Question 1

Which of the following is NOT a key element in strategic planning as it is described in the text?

Accepted Answer

A)   the mission statement
B)   the statement of the corporation's scope
C)   the statement of cash flows
D)   the statement of corporate objectivesE) B) and D)
F) A) and B)

Question 2

To determine the amount of additional funds needed (AFN), you may subtract the expected increase in liabilities, which represents a source of funds, from the sum of the expected increases in retained earnings and assets, both of which are uses of funds.

Accepted Answer

A) True 
 B)False

Question 3

The first, and most critical, step in constructing a set of pro forma financial statements is the sales forecast.

Accepted Answer

A) True 
 B)False

Question 4

When we use the AFN formula to forecast the additional funds needed, we are implicitly assuming that all financial ratios are constant. This means, for example, that if you plotted a graph of inventories versus sales, the regression line would be linear and would have a positive (non zero) Y-intercept.

Accepted Answer

A) True 
 B)False

Question 5

The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales, assuming the firm is operating with a positive profit margin.

Accepted Answer

A) True 
 B)False

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following statements is correct?

Accepted Answer

A)   When we use the AFN formula, we assume that the ratios of assets and liabilities to sales (A*/S0 and L*/S0)  vary from year to year in a stable, predictable manner.
B)   Firms whose fixed assets are "lumpy" frequently have excess capacity, and this should be accounted for in the financial forecasting process.
C)   For a firm that uses lumpy assets, it is impossible to have small increases in sales without expanding fixed assets.
D)   When fixed assets are added in large, discrete units as a company grows, the assumption of constant ratios is more appropriate than if assets are relatively small and can be added in small increments as sales growE) A) and B)
F) A) and C)

Question 8

Which of the following is NOT one of the steps taken in the financial planning process?

Accepted Answer

A)   Forecast financial statements and use these projections to analyze the likely effects of the operating plan on profits and various financial ratios.
B)   Forecast the funds that will be needed to support the 5-year plan.
C)   Develop a cash budget for use in determining when funds will be needed or when surplus funds will be available for investment.
D)   Consult with key competitors about the optimal set of prices to charge, i.e., the prices that will maximize profits for our firm and its competitors.E) A) and B)
F) A) and C)

Question 9

The fact that long-term debt and common stock are raised infrequently and in large amounts lessens the need for the firm to forecast those accounts on a continual basis.

Accepted Answer

A) True 
 B)False

Question 10

Suppose that a firm's profit margin is 5%, its debt/assets ratio is 56%, and its dividend payout ratio is
40%. If the firm is operating at less than full capacity, then sales could increase to some extent without the need for external funds; however, but if it is operating at full capacity with respect to all assets, including fixed assets, then any positive growth in sales will require some external financing.

Accepted Answer

A) True 
 B)False

Question 11

The AFN formula would be appropriate if, in a regression of each asset and spontaneous liability on sales, the regression line was linear and passed through the origin.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following assumptions is embodied in the AFN formula forecasting method?

Accepted Answer

A)   All balance sheet accounts are tied directly to sales.
B)   Accounts payable and accruals are tied directly to sales.
C)   Common stock and long-term debt are tied directly to sales.
D)   Fixed assets, but not current assets, are tied directly to sales.E) B) and D)
F) A) and D)

Question 13

Last year Handorf-Zhu Inc. had $850 million of sales, and it had $425 million of fixed assets that were used at only 60% of capacity. What is the maximum sales growth rate the company could achieve before it had to increase its fixed assets?

Accepted Answer

A)   57.16%
B)   60.17%
C)   63.33%
D)   66.67%E) None of the above
F) All of the above

Question 14

Which of the following statements is correct?

Accepted Answer

A)   Since accounts payable and accrued liabilities must eventually be paid off, as these accounts increase, AFN as calculated by the AFN equation must also increase.
B)   Suppose a firm is operating its fixed assets at below 100% of capacity, but it has no excess current assets. Based on the AFN equation, its AFN will be larger than if it had been operating with excess capacity in both fixed and current assets.
C)   If a firm retains all of its earnings, then it cannot require any additional funds to support sales growth.
D)   Additional funds needed (AFN)  are typically raised using a combination of notes payable, long-term debt, and common stock. Such funds are nonspontaneous in the sense that they require explicit financing decisions to obtain them.E) None of the above
F) A) and D)

Question 15

Which of the following defines spontaneously generated funds?

Accepted Answer

A)   the amount of assets required per dollar of sales
B)   a forecasting approach in which the forecasted percentage of sales for each item is held constant
C)   funds that a firm must raise externally through borrowing or by selling new common or preferred stock
D)   funds that are obtained automatically from normal operations, and they include spontaneous increases in accounts payable and accruals, plus additions to retained earningsE) A) and D)
F) A) and B)

Question 16

Two firms with identical capital intensity ratios are generating the same amount of sales. However, Firm A is operating at full capacity, while Firm B is operating below capacity. If the two firms expect the same growth in sales during the next period, then Firm A is likely to need more additional funds than Firm B, other things held constant.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements is correct?

Accepted Answer

A)   The most important step when developing pro forma financial statements is to determine the breakdown of common equity between common stock and retained earnings.
B)   The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales.
C)   In a financial plan, the way that liabilities and owner's equity are projected to change depends on the firm's sales forecast.
D)   The capital intensity ratio gives us an idea of the physical condition of the firm's fixed assets.E) A) and B)
F) B) and D)

Question 18

One of the key steps in the development of pro forma financial statements is to identify those assets and liabilities that increase spontaneously with sales.

Accepted Answer

A) True 
 B)False

Question 19

Last year Emery Industries had $450 million of sales and $225 million of fixed assets, so its FA/Sales ratio was 50%. However, its fixed assets were used at only 65% of capacity. If the company had been able to sell off enough of its fixed assets at book value so that it was operating at full capacity, with sales held constant at $450 million, how much cash (in millions)  would it have generated?

Accepted Answer

A)   $74.81
B)   $78.75
C)   $82.69
D)   $86.82E) A) and B)
F) A) and C)

Question 20

A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset.

Accepted Answer

A) True 
 B)False

Exam 5: Financial Planning and Forecasting Financial Statements

To determine the amount of additional funds needed (AFN), you may subtract the expected increase in liabilities, which represents a source of funds, from the sum of the expected increases in retained earnings and assets, both of which are uses of funds.

Correct Answer
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Correct Answer
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Which of the following assumptions is embodied in the AFN formula forecasting method?

Correct Answer
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Which of the following is NOT a key element in strategic planning as it is described in the text?

Correct Answer
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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.

Correct Answer
verified

One of the key steps in the development of pro forma financial statements is to identify those assets and liabilities that increase spontaneously with sales.

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

Correct Answer
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The fact that long-term debt and common stock are raised infrequently and in large amounts lessens the need for the firm to forecast those accounts on a continual basis.

Correct Answer
verified

Which of the following defines spontaneously generated funds?

Correct Answer
verified

Last year Handorf-Zhu Inc. had $850 million of sales, and it had $425 million of fixed assets that were used at only 60% of capacity. What is the maximum sales growth rate the company could achieve before it had to increase its fixed assets?

Correct Answer
verified

The AFN formula would be appropriate if, in a regression of each asset and spontaneous liability on sales, the regression line was linear and passed through the origin.

Correct Answer
verified

Which of the following is NOT one of the steps taken in the financial planning process?

Correct Answer
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Correct Answer
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Correct Answer
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The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales, assuming the firm is operating with a positive profit margin.

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

The first, and most critical, step in constructing a set of pro forma financial statements is the sales forecast.

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset.

Correct Answer
verified

Exam 5: Financial Planning and Forecasting Financial Statements

To determine the amount of additional funds needed (AFN), you may subtract the expected increase in liabilities, which represents a source of funds, from the sum of the expected increases in retained earnings and assets, both of which are uses of funds.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following assumptions is embodied in the AFN formula forecasting method?

Correct AnswerverifiedShow Answer

Which of the following is NOT a key element in strategic planning as it is described in the text?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

One of the key steps in the development of pro forma financial statements is to identify those assets and liabilities that increase spontaneously with sales.

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The fact that long-term debt and common stock are raised infrequently and in large amounts lessens the need for the firm to forecast those accounts on a continual basis.

Correct AnswerverifiedShow Answer

Which of the following defines spontaneously generated funds?

Correct AnswerverifiedShow Answer

Last year Handorf-Zhu Inc. had $850 million of sales, and it had $425 million of fixed assets that were used at only 60% of capacity. What is the maximum sales growth rate the company could achieve before it had to increase its fixed assets?

Correct AnswerverifiedShow Answer

The AFN formula would be appropriate if, in a regression of each asset and spontaneous liability on sales, the regression line was linear and passed through the origin.

Correct AnswerverifiedShow Answer

Which of the following is NOT one of the steps taken in the financial planning process?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales, assuming the firm is operating with a positive profit margin.

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

The first, and most critical, step in constructing a set of pro forma financial statements is the sales forecast.

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset.

Correct AnswerverifiedShow Answer

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