17.1 An Overview of Financial Planning
1) Types of plans that businesses typically use to guide
their operations include
A) strategic plans.
B) long-range financial plans.
C) short-range financial plans.
D) all of the above.
2) Because financial planning usually takes place in a
highly uncertain environment
A) it is rarely worth the time and expense.
B) time horizons should be limited to a few months.
C) it is important to develop contingency plans to respond
to unexpected events.
D) it should avoid such specific issues as what sources of
financing to use.
3) Long-term financial plans typically encompass
A) 6 to 12 months.
B) about 5 years.
C) 5 to 10 years.
D) the entire lifecycle of the corporation.
4) Strategic planning encompasses all of the following
EXCEPT
A) a cash budget.
B) a description of the firm's core competencies and
activities.
C) a definition of the firm's customers.
D) a description of the firm's competitors and its own
competitive strengths and weaknesses.
5) Short-term financial plans span a period of
A) up to five years.
B) one to three years.
C) a year or less.
D) 1 month or less.
6) Short-term financial planning results in
A) a cash budget.
B) pro forma financial statements.
C) a sales forecast for the next 1 to 3 years.
D) a general narrative detailing near-term scenarios.
7) Long-term financial planning results in
A) a cash budget.
B) pro forma financial statements.
C) a sales forecast for the next 1 to 3 years.
D) a general narrative detailing near-term scenarios.
8) Typical steps in the financial planning process include
A) preparing a sales forecast.
B) analyzing cost data.
C) estimating tax expense.
D) all of the above.
9) The financial planning process is the responsibility of
A) financial analysts.
B) operations staff.
C) marketing staff
D) financial analysts, marketing staff, and operations
staff interacting as a group.
10) The key ingredient in a firm's financial planning is
the sales forecast.
Answer: TRUE
11) Pro forma financial statements are a required
part of the firm's tax returns.
Answer: FALSE
12) One purpose of long-term financial plans is to estimate
the firm's future capital spending and financing needs.
Answer: FALSE
13) Cash budgets usually include details such as the timing
of materials purchases, interest payments, and the like.
Answer: TRUE
14) One disadvantage of long-term plans is a loss of
flexibility in responding to unexpected events.
Answer: FALSE
15) Long-term financial plans require that the firm have
well-defined goals and objectives.
Answer: TRUE
16) Discuss the basic functions that budgets perform for a
firm.
Answer: The budget
is a short-term financial plan. It forecasts in detail sales, payments for
variable and fixed costs, and other required payments such as interest,
dividends, and taxes. One of the budgets most important functions is
anticipating financing needs so that arrangements can be made well in advance.
It is also a good instrument for monitoring performance and making adjustments
as the budgeting period unfolds.
17) What are the key questions that a strategic plan attempts
to answer? How does it relate to financial plans?
Answer: The
strategic plan asks such fundamental questions as: "Who are we and what do
we do?" "Who are our customers?" "Who are our competitors
and how do we compete?" The strategic plan provides the broader context
for short and long-term financial plans.
18) Why is financial planning important in a highly
uncertain financial environment.
Answer: Even when
conditions are changing rapidly and in ways that are difficult to foresee, the
process of financial planning forces managers to think carefully about the
future. As a result, they will be better prepared to respond to contingencies
even if they eventually turn out to be quite different from what was
anticipated.
17.2 Developing a Long-Term Financial Plan
1) What is the most important ingredient in developing a
firm's financial plan?
A) A forecast of sales revenues
B) Determining the amount of dividends to pay shareholders
C) Projecting the rate of interest on proposed new debt
D) Deciding upon which method of depreciation a firm should
utilize
2) The percent-of-sales method can be used to forecast
A) expenses.
B) assets.
C) liabilities.
D) all of the above.
3) Apple Two Enterprises expects to generate sales of
$5,950,000 for fiscal 2014; sales were $3,450,000 in fiscal 2013. Assume the
following figures for the fiscal year ending 2013: cash $70,000; accounts
receivable $250,000; inventory $400,000; net fixed assets $520,000; accounts
payable $235,000; and accruals $155,000. Use the percent-of-sales method to
forecast cash for the fiscal year ending 2014.
A) $120,725
B) $75,003
C) $216,418
D) $319,604
4) Which of the following statements about the
percent-of-sales method of financial forecasting is true?
A) It is the least commonly used method of financial
forecasting.
B) It is a much more precise method of financial
forecasting than a cash budget would be.
C) It involves estimating the level of an expense, asset,
or liability for a future period as a percent of the forecast for sales
revenues.
D) It projects all liabilities as a fixed percentage of
sales.
5) The first step involved in predicting financing needs is
A) projecting the firm's sales revenues and expenses over
the planning period.
B) estimating the levels of investment in current and fixed
assets that are necessary to support the projected sales.
C) determining the firm's financing needs throughout the
planning period.
D) none of the above.
6) A sales forecast for the coming year would reflect
A) any past trend which is expected to continue.
B) the influence of any events that might materially affect
the past trend.
C) both A and B.
D) neither A nor B.
7) The "percentage" used in the percent-of-sales
calculation can be obtained from
A) the most recent financial statement item as a percent of
current sales.
B) an average computed over several years.
C) an analyst's judgment.
D) all of the above.
8) Which of the following are considered to be spontaneous
sources of financing (i.e., they arise naturally during the course of doing
business)?
A) Notes payable and common stock
B) Accounts receivable and bonds
C) Fixed assets and inventory
D) Accounts payable and accrued expenses
9) Which of the following require adjustments when
forecasting asset needs as a percent of sales?
A) If assets must be purchased in large, discrete
quantities
B) When the firm has excess capacity
C) When assets can be leased rather than purchased
D) Both A and B
10) The preparation of pro forma financial statements
accomplishes which of the following objectives?
A) It allows management to pinpoint a firm's optimal stock
price.
B) It is essential if the firm is to accurately estimate
its weighted average cost of capital.
C) It assists management in making decisions with respect
to raising the capital that is needed for growth.
D) It pinpoints periods when the firm will have short-term
cash surpluses.
11) Which of the following assumptions is not required by
the percent of sales method?
A) The inventory turnover will remain constant during the
forecast period.
B) The profit margin will remain constant during the
forecast period.
C) Cash, as a percent of sales, will remain constant
throughout the forecast period.
D) The debt to equity ratio will remain constant throughout
the forecast period.
12) Apple Two Enterprises expects to generate sales of
$5,950,000 for fiscal 2014; sales were $3,450,000 in fiscal 2013. Assume the
following figures for the fiscal year ending 2013: cash $70,000; accounts
receivable $250,000; inventory $400,000; net fixed assets $520,000; accounts
payable $235,000; and accruals $155,000. Use the percent-of-sales method to
forecast accounts payable for the fiscal year ending 2014.
A) $212,036
B) $405,290
C) $619,619
D) $155,000
13) Assume that Zybo, Inc. has sales of $10 million and
inventory of $2 million. The corporation utilizes the percent-of-sales method
of financial forecasting. If Zybo is expected to generate sales of $14 million
next year, what will the firm's investment in inventory be?
A) $1.4 million
B) $2.0 million
C) $2.8 million
D) None of the above
14) Assume that Calamar Corp. has sales of $7.5 million and
accounts payable of $450,000. The corporation utilizes the percent-of-sales
method of financial forecasting. If Calamar is expected to generate sales of $9
million next year, what will the firm's accounts payable be?
A) $540,000
B) $450,000
C) $405,000
D) None of the above
15) Assume that Hercules Manufacturing has sales of $25
million and current assets of $5 million. The corporation utilizes the
percent-of-sales method of financial forecasting. If Hercules is expected to
generate sales of $31 million next year, what will the firm's investment in current
assets be?
A) $8.3 million
B) $4.0 million
C) $6.2 million
D) $5.0 million
16) Assume that Gatsby Enterprises has sales of $83 million
and fixed assets of $22.4 million in 2013. The corporation utilizes the
percent-of-sales method of financial forecasting. If Gatsby is expected to
generate sales of $94 million in 2014, what will the firm's investment in fixed
assets be? The minimum fixed asset expansion costs $4,000,000.
A) $19.8 million
B) $26.4 million
C) $16.2 million
D) $25.4 million
17) Apple Two Enterprises expects to generate sales of
$5,950,000 for fiscal 2014; sales were $3,450,000 in fiscal 2013. Assume the
following figures for the fiscal year ending 2013: cash $70,000; accounts
receivable $250,000; inventory $400,000; net fixed assets $520,000; accounts
payable $235,000; and accruals $155,000. Use the percent-of-sales method to
forecast accruals for the fiscal year ending 2014.
A) $890,001
B) $412,316
C) $267,319
D) $350,814
18) The percent-of-sales method of forecasting makes which
of the following assumptions?
A) That some assets do not increase in direct proportion to
an increase in sales.
B) The accounts receivable average collection period will
remain constant throughout the forecast period.
C) The firm may acquire some "lumpy" assets.
D) All of the above.
19) Discretionary financing needs
implies
A) that management may choose between various forms of debt
and equity.
B) that the purchases being financed are optional rather
than necessary.
C) that management has considerable discretion in how to
dispose of retained earnings.
D) that management may choose between debt, new equity or
retained earnings.
20) Spontaneous sources of financing include
A) accounts payable and accrued expenses.
B) notes payable and mortgages payable.
C) long-term debt and capital leases.
D) common stock and paid-in capital.
21) Which of the following is the correct method of determining
discretionary financing needed (DFN)?
A) Projected change in assets, divided by projected change
in liabilities, plus projected change in owner's equity
B) Projected change in assets, times projected change in
owner's equity, minus projected change in liabilities
C) Projected change in owner's equity, minus projected
change in liabilities, plus projected change in assets
D) Projected change in assets, minus projected change in
liabilities, minus projected change in owner's equity
22) A discretionary form of financing would be
A) notes payable.
B) accounts payable.
C) accrued expenses.
D) none of the above.
23) An increase in projected ________ will increase
discretionary funds needed.
A) cash dividends
B) sales
C) retained earnings
D) both A and B
24) Assume all else remains the same. Which of the
following statements is true?
A) The lower the dividend payout, the less a firm will have
to reinvest.
B) The higher the dividend payout, the more discretionary
financing a firm will require.
C) The lower the dividend payout, the more discretionary
financing a firm will require.
D) The higher the dividend payout, the higher the retention
percentage.
25) An exceptionally high growth rate in sales will
typically
A) initially increase the firm's need for discretionary
financing.
B) generate enough cash flow to cover asset expansion.
C) allow the firm to increase its dividend in anticipation
of higher cash flows.
D) allow the firm to finance expansion with spontaneous
sources of financing.
26) Which of the following accounts would normally increase
with an increase in sales and approximately in proportion to the sales
increase?
A) Common stock
B) Inventory
C) Notes payable
D) Dividends
27) Holding other things constant, a firm's
"discretionary financing needed" (the additional funds required in
order to finance the firm) would be reduced if the firm experienced an increase
in which of the following?
A) The dividend pay-out ratio
B) The profit margin
C) The accounts receivable average collection period
D) The expected growth rate in sales
28) Which of the following is a source of external capital?
A) Retained earnings
B) Inventory
C) Long-term debt
D) Operating income (earnings before interest and taxes)
29) Considering each action independently and holding other
things constant, which of the following actions would increase a firm's
discretionary financing needed (the need for additional capital)?
A) A decrease in the firm's accounts receivable average
collection period
B) An increase in the firm's profit margin
C) A decrease in the firm's inventory turnover
D) A decrease in the expected growth rate in sales
30) Which of the following will decrease discretionary
funds needed?
A) An increase in projected accounts receivable
B) An increase in projected accounts payable
C) An increase in projected dividends
D) Both A and C
31) Which of the following is a spontaneous source of
financing?
A) Accrued expenses
B) Notes payable
C) Common stock
D) Paid-in capital
32) Swings in discretionary financing needed can be caused
by
A) firm profitability.
B) the growth rate of sales.
C) the need to upgrade technology and physical assets from
time to time.
D) all of the above.
33) Which of the following will reduce the firm's financing
requirements?
A) The firm operates at full capacity
B) The firm has excess capacity
C) The firm expects rapid growth in sales
D) The firm increases its dividend payout ratio
Use the following information and the percent-of-sales
method to answer the following question(s).
Below is the 2014 year-end balance sheet for Banner, Inc.
Sales for 2014 were $1,600,000 and are expected to be $2,000,000 during 2015.
In addition, we know that Banner plans to pay $90,000 in 2015 dividends and
expects projected net income of 4% of sales. (For consistency with the Answer
selections provided, round your forecast percentages to two decimals.)
Banner, Inc. Balance Sheet
December 31, 2014
Assets
Current assets $890,000
Net fixed assets 1,000,000
Total $1,890,000
Liabilities and Owners'
Equity
Accounts payable $160,000
Accrued expenses 100,000
Notes payable 700,000
Long-term debt 300,000
Total liabilities 1,260,000
Common stock (plus paid-in
capital) 360,000
Retained earnings 270,000
Common equity 630,000
Total 1,890,000
34) Banner's projected current assets for 2015 are
A) $1,000,000.
B) $1,120,000.
C) $1,500,000.
D) $1,260,000.
35) Banner's projected fixed assets for 2015 are
A) $1,120,000.
B) $1,260,000.
C) $1,000,000.
D) $2,380,000.
36) Banner's projected accounts payable balance for 2015 is
A) $160,000.
B) $120,000.
C) $200,000.
D) $300,000.
37) Banner's projected accrued expenses for 2015 are
A) $120,000.
B) $160,000.
C) $100,000.
D) $200,000.
38) Banner's projected long-term debt for 2015 is
A) $700,000.
B) $880,000.
C) $380,000.
D) $300,000.
39) Banner's projected retained earnings for 2015 are
A) $260,000.
B) $280,000.
C) $340,000.
D) $350,000.
40) Banner's projected discretionary financing needed for
2015 is
A) $420,000.
B) $440,000.
C) $360,000.
D) $370,000.
41) The projected change in retained earnings equals
projected net income less any dividends to be paid.
Answer: TRUE
42) The initiation of a major advertising campaign would be
an example of an event that would affect past trends in sales when projecting
statements.
Answer: TRUE
43) The percentages used in the percent-of-sales method
comes from pro forma financial statements.
Answer: FALSE
44) The percent-of-sales method is a commonly used method
for estimating a firm's financing needs.
Answer: TRUE
45) Long-term financial plans must include capital
expenditures.
Answer: TRUE
46) Asset purchases frequently precede a rapid increase in
sales and require increased discretionary financing.
47) Holding all other variables constant, as the dividend
payout ratio decreases, the sustainable growth rate increases.
Answer: TRUE
48) Pro forma statements provide single point estimates of
each budgeted item.
Answer: TRUE
49) Pro forma statements are important since they formally
report the performance of the firm during a previous reporting period.
Answer: FALSE
50) When forecasting statements, assets always increase
proportionately to sales regardless of capacity.
Answer: FALSE
51) The most commonly used method for making financial
forecasts is the percent-of-sales method.
Answer: TRUE
52) It is common practice to develop optimistic and
pessimistic scenarios when projecting financial statements.
Answer: TRUE
53) Discretionary sources of financing are those sources
that vary automatically with a firm's level of sales.
Answer: FALSE
54) When fixed expenses increase relative to sales, it
indicates that there is not enough productive capacity to absorb an increase in
sales.
Answer: TRUE
55) If the firm's current fixed assets are sufficient to
support the projected level of new sales, then these assets would be projected
to remain unchanged for the forecast period.
Answer: TRUE
56) Because accounts payable and accrued expenses increase
with sales, they represent sources of spontaneous financing.
Answer: TRUE
57) What is meant by spontaneous financing?
Answer: Certain
types of financing typically increase "spontaneously" with sales and
are "free" in the sense that no interest expense is incurred.
Examples: Inventory typically increases with sales and accounts payable
increase with inventory. Accounts payable are interest-free loans provided by
the firm's vendors to finance inventory purchases. Also, as sales increase, we
would expect payroll, and therefore accrued salaries and wages payable to
increase. Accrued wages and salaries are interest-free loans from employees to
their employers.
58) What is meant by discretionary financing?
Answer:
Discretionary financing could be any type of short-term or long-term
loan whether it be a line of credit from a bank to finance working capital
needs or a major bond issue. The major point is that the firm must initiate a
formal borrowing process, subject itself to a credit review, and incur a cost
in the form of interest. Discretionary financing could also take the form of
issuing new preferred or common stock. Again, a cost is incurred in the form of
return to the stockholders.
59) The balance sheet of the Jackson Company is presented
below:
Jackson Company
Balance Sheet
March
31, 2014
(Millions
of Dollars)
Current assets $12 Accounts
payable $6
Fixed assets 18 Long-term debt 12
Total $30 Common equity 12
Total
$30
For the year ending March 31, 2014, Jackson had sales of
$35 million. The common stockholders received all net earnings of the firm in
the form of cash dividends, leaving no funds from earnings available to the
firm for expansion (assume that depreciation expense is just equal to the cost
of replacing worn-out assets).
Construct a pro forma balance sheet for March 31, 2015 for
an expected level of sales of $45 million. Assume current assets and accounts
payable vary as a percent of sales, and fixed assets remain at the present
level. Use notes payable as a source of discretionary financing.
Answer:
Jackson
Company
Pro Forma
Balance Sheet
March
31, 2015
(Millions
of dollars)
Current assets $15.4 Accounts
payable $7.7
Fixed assets 18.0 Notes payable 1.7
Total $33.4 Long-term debt 12.0
Common
equity 12.0
Total $33.4
60) Au Courant Bakery is a new firm specializing in gluten
free pastry products. In attempting to determine what the financial position of
the firm should be, the financial manager obtained the following average data
for the baking industry for 2014. All
data is expressed as a percentage of sales.
Fill in the dollar amounts on Au Courant's pro forma balance
sheet assuming 2015 sales are $450,000.
Au Courant Bakery
Pro Forma Balance Sheet
December 31, 2015
Cash, 2.22% Accounts
payable, 6.67%
Accounts receivable, 2.78% Long-term debt, 6.67%
Inventory, 3%
Total current assets ? Common equity, ?
Fixed assets ? Total
liabilities and equity, ?
Total assets, 33%
Answer:
Au
Courant Bakery
Pro Forma
Balance Sheet
December
31, 2015
Cash $9,900 Current debt $30,000
Accounts receivable 12,510 Long-term
debt 30,000
Inventory 13,500
Total current assets $35,910 Common
equity 90,000
Fixed assets 114,090 Total liabilities
Total assets $150,000 and equity $150,000
61) Amalgamated Enterprises is planning to purchase some
new equipment. With this new equipment, the company expects sales to increase
from $8,000,000 to $10,000,000. A portion of the financing for the purchase of
the equipment will come from a $1,000,000 new common stock issue. The company
knows that current assets, fixed assets, accounts payable, and accrued expenses
increase in direct proportion with sales. The company's net profit margin on
sales is 8%, and the company plans to pay 40% of its after-tax earnings in
dividends. A copy of the company's current balance sheet is given below:
Amalgamated Enterprises
Balance Sheet
Current assets $3,000,000
Fixed assets 12,000,000
Total assets $15,000,000
Accounts payable $4,000,000
Accrued expenses 1,000,000
Long-term debt 3,000,000
Common stock 2,000,000
Retained earnings 5,000,000
Total liabilities and net
worth $15,000,000
Prepare a pro forma balance
sheet for Amalgamated for next year using the percent-of-sales method and the
information provided above.
Answer:
Amalgamated Enterprises
Pro Forma Balance Sheet
Projected
Present
Percent Based on
Level
of Sales of
(Mil)
Sales $10 Mil
Current assets
$2 .375 $3.75
Fixed assets 12 1.500 15.00
Total assets $15 $18.75
Accounts
payable $4 .50 $5.00
Accrued
expenses $1 .125 1.25
Long-term debt
3 a. 4.02d.
Common stock 2 a. 3.00b.
Retained
earnings 5 a. 5.48c.
Total
liabilities
and net worth $15 $18.75
Notes
a. Not applicable. These accounts are assumed not to vary
directly with sales.
b. The company issued $1 million in new common stock.
c. The increase in retained earnings is equal to net profit
minus dividends paid. Increase in retained earnings = (.08)($1M)(1 - .40) =
$.48M
d. The long-term debt on the projected balance sheet is
equal to total assets minus accounts payable, accrued expenses, common stock,
and retained earnings. Long-term debt = $18.75M = $5.0M + $1.25M + $3.0M +
$5.48M = $4.02M
62) Lindsey Insurance Co. has current sales of $10 million
and predicts next year's sales will grow to $14 million. Current assets are $3
million and fixed assets are $4 million. The firm's net profit margin is 7%
after taxes. Presently, Lindsey has $900,000 in accounts payable, $1.1 million
in long-term debt, and $5 million (including $2.5 million in retained earnings)
in common equity. Next year, Lindsey projects that current assets will rise in
direct proportion to the forecasted sales, and that fixed assets will rise by
$500,000. Lindsey also plans to pay dividends of $400,000 to common
shareholders.
a. What are Lindsey's total financing needs for the
upcoming year?
b. Given the above information, what are Lindsey's
discretionary financing needs?
Answer:
a. Projected Financing Needs = Projected Total Assets = Projected Current Assets + Projected Fixed Assets = ($3m/$10m) × $14m + $4m + $.5m = $8.7m
a. Projected Financing Needs = Projected Total Assets = Projected Current Assets + Projected Fixed Assets = ($3m/$10m) × $14m + $4m + $.5m = $8.7m
b. DFN = Projected Current Assets + Projected Fixed Assets
- Present LTD - Present Owner's Equity - [Projected Net Income - Dividends] -
Spontaneous Financing = ($3m/$10m) × $14m + $4.5m - $1.1m - $5m - [.07 × $14m -
$.4m] - ($.9m/$10m) × $14m
DFN = $4.2m + $4.5m - $6.1m - $.58m - $1.26m = $.76m
17.3 Developing a Short-Term Financial Plan
1) Which of the following is NOT a basic function of a
budget?
A) Budgets indicate the need for future short-term
financing.
B) Budgets provide the basis for corrective action when
actual figures differ from the budgeted figures.
C) Budgets compare historical costs of the firm with its
current cost performance.
D) Budgets allow for performance evaluation.
2) Which of the following will increase cumulative
borrowing in the cash budget?
A) Slower collections from customers
B) Slower payments to suppliers
C) Higher interest rates
D) Faster collection of receivables
3) All of the following are found in the cash budget EXCEPT
A) a net change in cash for the period.
B) inventory.
C) cash disbursements.
D) new financing needed.
4) Purchases of plant and equipment can be determined from
the
A) current cash budget.
B) previous period's balance sheet.
C) pro forma income statement.
D) use of ratio analysis.
5) Which of the following is always a non-cash expense?
A) Income taxes
B) Salaries
C) Depreciation
D) None of the above
6) A company collects 60% of its sales during the month of
the sale, 30% one month after the sale, and 10% two months after the sale. The
company expects sales of $10,000 in August, $20,000 in September, $30,000 in
October, and $40,000 in November. How much money is expected to be collected in
October?
A) $25,000
B) $15,000
C) $35,000
D) None of the above
7) The function of a budget includes to
A) indicate the amount and time of future financing needs.
B) provide a basis for corrective action.
C) provide information for performance evaluations.
D) all of the above.
Table
1
Dorian Industries' projected sales for the first six months
of 2014 are given below:
Jan. $200,000 April $400,000
Feb. $240,000 May
$320,000
March $280,000 June
$320,000
25% of sales is collected in cash at the time of the sale,
50% is collected in the month following the sale, and the remaining 25% is
collected in the second month following the sale. Cost of goods sold is 75% of
sales. Purchases are made in the month prior to the sale, and payments for
purchases are made in the month of the sale. Total other cash expenses are $60,000/month.
The company's cash balance as of February 28, 2004 will be $40,000. Excess cash
will be used to retire short-term borrowing (if any). Dorian has no short-term
borrowing as of February 28, 2014. Assume that the interest rate on short-term
borrowing is 1% per month. The company must have a minimum cash balance of
$25,000 at the beginning of each month. Round all answers to the nearest $100.
8) Based on the information in Table 1, what are Dorian
Industries' total cash receipts (collections) for April 2014?
A) $400,000
B) $300,000
C) $100,000
D) ($60,000)
9) Based on the information in Table 1, what is Dorian
Industries' total disbursement in May (not including interest on short-term
borrowing)?
A) $300,000
B) $240,000
C) $25,900
D) ($60,000)
10) Based on the information in Table 1, what is Dorian
Industries' ending cash balance (before borrowing) in March?
A) $10,000
B) $25,000
C) $20,000
D) ($30,000)
11) Based on the information in Table 1, what is Dorian's
projected cumulative short-term borrowing as of April 30, 2014?
A) $15,000
B) $60,000
C) $35,150
D) $75,000
12) Based on the information in Table 1, what is Dorian's
projected EBIT for March 2014?
A) ($10,000)
B) ($30,000)
C) $70,000
D) None of the above
Table
2
Fielding Wilderness
Outfitters had projected its sales for the first six months of 20 14 to be as
follows:
Jan. $50,000 April
$180,000
Feb. $60,000 May
$240,000
March $100,000 June
$240,000
Cost of goods sold is 60% of sales. Purchases are made and
paid for two months prior to the sale. 40% of sales are collected in the month
of the sale, 40% are collected in the month following the sale, and the
remaining 20% in the second month following the sale. Total other cash expenses
are $40,000/month. The company's cash balance as of March 1, 2014 is projected
to be $40,000, and the company wants to maintain a minimum cash balance of
$15,000. Excess cash will be used to retire short-term borrowing (if any
exists). Fielding has no short-term borrowing as of March 1, 2014. Assume that
the interest rate on short-term borrowing is 1% per month.
13) Based on the information contained in Table 2, what are
Fielding's projected total receipts (collections) for April?
A) $124,000
B) $180,000
C) ($4,000)
D) $36,000
14) Based on the information in Table 2, what was
Fielding's projected loss for March?
A) $184,000
B) $110,000
C) $84,000
D) None of the above
15) Based on the information in Table 2, how much
short-term financing is needed by March 30, 2014?
A) $110,000
B) $15,000
C) $70,000
D) $85,000
16) Miller Metalworks had sales in November of $60,000, in
December of $40,000, and in January of $80,000. Miller collects 40% of sales in
the month of the sale and 60% one month after the sale. Calculate Miller's cash
receipts for January.
A) $44,000
B) $56,000
C) $64,000
D) $72,000
Table
3
Thompson Manufacturing Supplies' projected sales for the
first six months of 2014 are given below.
Jan. $250,000 April $400,000
Feb. $300,000 May
$450,000
March $400,000 June
$400,000
40% of sales is collected in the month of the sale, 50% is
collected in the month following the sale, and 10% is written off as
uncollectible. Cost of goods sold is 70% of sales. Purchases are made the month
prior to the sale and are paid during the month the purchases are made (i.e.
goods sold in March are bought and paid for in February). Total other cash
expenses are $50,000/month. The company's cash balance as of February 1, 2014
will be $40,000. Excess cash will be used to retire short-term borrowing (if
any). Thompson has no short-term borrowing as of February 28, 2014. Assume that
the interest rate on short-term borrowing is 1% per month. The company must
have a minimum cash balance of $25,000 at the beginning of each month. Round
all answers to the nearest $100.
17) Based on the information in Table 3, what are
Thompson's projected total receipts (collections) for March?
A) $400,000
B) $310,000
C) ($20,000)
D) $320,000
18) Based on the information in Table 3, what is Thompson's
projected cumulative borrowing as of March 1, 2014?
A) $85,000
B) $45,000
C) $70,000
D) - 0 -
19) Based on the information in Table 3, what is Thompson's
projected cash balance as of April 1, 2014?
A) $32,000
B) $4,300
C) $25,000
D) None of the above
20) The primary purpose of a cash budget is to
A) determine the level of investment in current and fixed
assets.
B) determine accounts payable.
C) provide a detailed plan of future cash flows.
D) determine the estimated income tax for the year.
21) Your firm is trying to determine its cash disbursements
for the next two months (June and July). In any month, the firm makes purchases
of 60% of that month's sales, which are paid the following month. In addition,
the firm incurs the following costs every month and pays for them in the month
the expenses are incurred: wages/salaries of $10,000, rent of $4,000, and
miscellaneous cash expenses of $1,000. Depreciation amortized on a monthly
basis is $2,000. June's sales are expected to be $100,000, and July's sales are
expected to be $150,000. Cash disbursements for the month of July are expected
to be
A) $105,000.
B) $107,000.
C) $77,000.
D) $75,000.
22) As of December 31, Budget, Inc. had a cash balance of
$50,000. December sales were $150,000 and are expected to be $100,000 in
January. 20% of sales in any month are cash sales, and 80% of sales are
collected during the following month. In January, Budget is expected to have
total cash disbursements of $120,000, and Budget requires a minimum cash
balance of $50,000. Budget's expected cash receipts for January are
A) $80,000.
B) $100,000.
C) $110,000.
D) $140,000.
23) Which of the following is NOT an element of the cash budget?
A) Cash receipts
B) Cash disbursements
C) Depreciation expense
D) New financing needed
24) Which of the following will decrease cumulative
borrowing on the cash budget?
A) A decrease in interest expense
B) A decrease in collections
C) An increase in equipment purchases
D) Both A and B
25) Home to House Distributors is preparing a cash budget.
The initial conclusion is that the firm will need to borrow more money than its
bank is willing to lend. Which of the following actions could Home to House
Distributors perform to reduce its need for bank financing this year?
A) Pay cash for purchasing inventory instead of having to
rely on trade credit
B) Prepay next year's quarterly income tax payments
C) Try to collect the firm's accounts receivable faster
D) Purchase larger quantities of inventory to take
advantage of trade discounts
26) Which of the following expenses should be included as a
cash outlay in the preparation of a cash budget?
A) The payment of accounts payable
B) The payment of depreciation expense
C) The payment of accrued income taxes
D) All of the above
27) The preparation of a cash budget serves which of the
following purposes?
A) To estimate the amount and timing of cash flows that are
needed in order to optimize the price of the firm's common stock
B) To calculate the amount of future cash flows that would
be needed in order to achieve the optimal level of financing during the
forecast period
C) To determine the amount and timing of short-term
financing that would be required for the operation of a business during the
forecast period
D) To estimate the amount of sales volume that would be
required in order to achieve the break-even point
28) The timing of collections from sales made in past
months is an important consideration for cash budgeting.
Answer: TRUE
29) Depreciation expense is a deduction from cash flow in
the cash budget.
Answer: FALSE
30) The percent-of-sales method is more detailed than the
cash budget method.
Answer: FALSE
31) Depreciation expense is always included in the cash
budget as it reflects the impact of fixed asset purchases.
Answer: FALSE
32) The cash budget can be used to provide an estimate of
the firm's future financing needs.
Answer: TRUE
33) The cash budget ignores discretionary financing.
Answer: FALSE
34) A budget is a forecast of future events.
Answer: TRUE
35) Broad Cloth, Inc.'s average collection period is 15
days. The vice-president of marketing has projected credit sales of $2. million
for October, $2.5 million for November and $3 million for December. Compute
cash collections for November and December. Assume that all months have 30
days.
Answer:
November collections = last 50% of October + first 50% of
November = .5(2,000,000) + .5(2,500,000) = $2,250,000.
December collections = last 50% of November + first 50% of
December = .5(2,500,000) + .5(3,000,000) = $2,750,000.
36) Broad Cloth, Inc.'s average collection period is 15
days. The vice-president of marketing has projected credit sales of $2. million
for October, $2.5 million for November and $3 million for December. Purchases
equal 60% of sales and are made one month in advance of budgeted sales.
Payments are made 1 month after the date of purchase. Compute payments for
purchases for the months of November and December.
Answer:
October purchases = .6(2,500,000) = $1,500,000. This
payment will be made in November.
November purchases = .6(3,000,000) = $1,800,000. This
payment will be made in December.
37) The cash budget for Parker Process Meats, Inc. for the
fourth quarter of 2014 is given below:
Parker Process Meats, Inc.
Cash Budget for the Three Months Ending December 31, 2014
Cash receipts Oct.
Nov. Dec.
Total
collections $31,050
$4,050 $49,950
Cash
disbursements:
Purchases 44,550 48,600 52,650
Wages and
salaries 7,425 7,425 7,425
Other
expenses 2,025 1,350 675
Taxes
17,415
Total
disbursements $54,000 $57,375 $78,165
The expected sales for the period are as follows:
Oct.: $86,400 Nov.: $91,800 Dec.: $83,700
The total depreciation expense for the period will be
$8,775.
An interest payment on outstanding debt of $15,000 will be
made in December.
Using the information given, construct a pro forma income
statement for the final quarter of 2014 for Parker.
Answer:
Parker
Processed Meats, Inc.
Pro Forma Income Statement
For the Quarter Ended December 31, 2014
Sales $261,900
Less: cost of goods sold 145,800
Gross profits $116,100
Less:
Depreciation expense $8,775
Wages and salaries 22,275
Other expenses 4,050
Net operating income $81,000
Less: interest expense 15,000
Earnings before taxes $66,000
Less: income taxes 17,415
Net income $48,585
38) The treasurer for Brookdale Clothing must decide how
much money the company needs to borrow in July. The balance sheet for June 30,
2014 is presented below:
Brookdale Clothing
Balance Sheet
June
30, 2014
Cash
$75,000
Accounts payable $400,000
Marketable
securities 100,000 Long-term debt 300,000
Accounts
receivable 300,000 Common stock 100,000
Inventory
250,000 Retained earnings 200,000
Total
current assets 725,000 Total liabilities and
Fixed
assets 275,000 stockholder's equity $1,000,000
Total
assets $1,000,000
The company expects sales of
$250,000 for July. The company has observed that 25% of its sales is for cash
and that the remaining 75% is collected in the following month. The company
plans to purchase $400,000 of new clothing. Usually 40% of purchases is for
cash and the remaining 60% of purchases is paid in the following month.
Salaries are $100,000 per month, lease payments are $50,000 per month, and
depreciation charges are $20,000 per month. The company plans to purchase a new
building for $200,000 in July and sell its marketable securities for $100,000.
If the company must maintain a minimum cash balance of $50,000, how much money
must the company borrow in July?
Answer: Brookdale
Clothing
Cash Budget for July 2014
Cash Inflows
Reduction in cash $25,000
Sale of marketable securities
100,000
Collection of accounts
receivable 300,000
Cash sales (.25)($250,000) 62,500
Total cash inflows $487,500
Cash Outflows
Repayment of accounts payable
$400,000
Cash purchases 160,000
Salaries 100,000
Lease payments 50,000
Purchase of building 200,000
Total cash outflows $910,000
Net inflow (outflows) ($422,500)
The company needs to borrow $422,500.
Diff: 2
AACSB: 3.
Analytic thinking
Question Status: Revised
Objective: 17.3
Prepare a cash budget and use it to evaluate the amount and timing of a
firm's short-term financing requirements.
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of
Value
39) The ZYX Corporation is planning to request a line of
credit from its bank and wants to estimate its cash needs for the month of
September. The following sales forecasts have been made for 2014:
July $500,000
August $400,000
September $300,000
October $200,000
November $100,000
Collection estimates were
obtained from the credit collection department as follows: 20% collected within
the month of sale; 70% collected the first month following the sale; and 10%
collected the second month following the sale. Payments for labor and raw
materials are typically made in the month in which these costs are incurred.
Total labor and raw material costs each month are 50% of sales. General
administrative expenses are $30,000 per month, lease payments are $10,000 per
month, and depreciation charges are $20,000 per month. The corporation tax rate
is 40%; however, no corporate taxes are paid in September. Prepare a cash
budget for September.
Answer:
ZYX Corporation
Pro Forma Income Statement
September 2015
Sales $300,000
Total cost of goods sold 150,000
Gross profit $150,000
Depreciation 20,000
General administrative
expenses 30,000
Lease payments 10,000
Operating income $90,000
Taxes 36,000
Net income $54,000
ZYX Corporation
Cash Budget
September 2005
Cash Inflows
Collections from September
sales $60,000
Collections from August
sales 280,000
Collections from July sales 50,000
Total cash inflows $390,000
Cash Outflows
Labor and raw materials $150,000
General administrative
expenses 30,000
Lease payments 10,000
Total cash outflow $190,000
Net cash inflow $200,000
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