Chapter 17

Financial Management: Principles and Applications, 11e (Titman)
Chapter 17 Financial Forecasting and Planning

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.
Answer: D
Diff: 1
Topic: 17.1 An Overview of Financial Planning
Keywords: financial planning
Principles: Principle 3: Cash Flows Are the Source of Value
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.
Answer: C
Diff: 1
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.
Answer: B
Diff: 1
Keywords: long-term financial plans
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.
Answer: B
Diff: 1
1
Copyright 2011 Pearson Education, Inc.

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.
Answer: C
Diff: 1
Keywords: short-term financial plans
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.
Answer: A
Diff: 1
Keywords: short-term financial plans
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.
Answer: B
Diff: 1
8) Typical steps in the financial planning process include:
A) preparing a sales forecast.
B) analyzing cost data.
C) estimating tax expense.
Answer: D
Diff: 1
2
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.
Answer: D
Diff: 1
10) The key ingredient in a firm's financial planning is the sales forecast.
Answer: TRUE
Diff: 1
11) 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.
Diff: 1
Keywords: cash budgets
12) 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.
Diff: 2
13) 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.
Diff: 1
3

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
Answer: A
Diff: 2
Topic: 17.2 Developing a Long-Term Financial Plan
Keywords: sales forecast
2) The percent-of-sales method can be used to forecast:
A) expenses.
B) assets.
C) liabilities.
Answer: D
Diff: 2
Keywords: percent of sales method
3) Apple Two Enterprises expects to generate sales of $5,950,000 for fiscal 2002; sales were
$3,450,000 in fiscal 2001. Assume the following figures for the fiscal year ending 2001: 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 2002.
A) $120,725
B) $75,003
C) $216,418
D) $319,604
Answer: A
Diff: 2
Topic: 17.3 Developing a Short-Term Financial Plan
4
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.
Answer: C
Diff: 2
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.
Answer: A
Diff: 2
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.
Answer: C
Diff: 2
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.
Answer: D
Diff: 2
5
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
Answer: D
Diff: 2
Keywords: spontaneous financing sources
9) Under which of the following conditions would the percent-of-sales method of financial
forecasting be most accurate?
A) If assets must be purchased in discrete quantities
B) When asset requirements can be accurately forecasted as a constant percent of sales
C) If economic circumstances beyond a firm's control drastically change from one year to the
next
D) When economies of scale can be realized from investing in specific assets
Answer: B
Diff: 2
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.
Answer: C
Diff: 2
Keywords: pro forma financial statements
11) The percent-of-sales method of forecasting makes which of the following assumptions?
A) The inventory turnover will remain the same 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) All of the above.
E) None of the above.
Answer: D
Diff: 2
6

payable $235,000; and accruals $155,000. Use the percent-of-sales method to forecast accounts
payable for the fiscal year ending 2002.
A) $212,036
B) $405,290
C) $619,619
D) $155,000
Answer: B
Diff: 2
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
Answer: C
Diff: 2
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
Answer: A
Diff: 2
7
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
E) None of the above
Answer: C
Diff: 2
16) Assume that Helaron, Inc. has sales of $83 million and fixed assets of $22.4 million. The
corporation utilizes the percent-of-sales method of financial forecasting. If Helaron is expected
to generate sales of $94 million next year, what will the firm's investment in fixed assets be?
A) $19.8 million
B) $28.8 million
C) $16.2 million
D) $25.4 million
Answer: D
Diff: 2
payable $235,000; and accruals $155,000. Use the percent-of-sales method to forecast accruals
for the fiscal year ending 2002.
A) $890,001
B) $412,316
C) $267,319
D) $350,814
Answer: C
Diff: 2
8
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.
E) None of the above.
Answer: B
Diff: 2
19) Marjen Manufacturing has purchases equal to 40% of sales. They purchase one month prior
to sales and pay one month after sales. Given the following sales forecast, calculate Marjen's
payments for March.
Projected Sales
January
$80,000
February
$100,000
March
$120,000
A) $40,000
B) $60,000
C) $80,000
D) $100,000
Answer: A
Diff: 2
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.
Answer: A
Diff: 2
9
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
Answer: D
Diff: 2
Keywords: discretionary financing needs (DFN)
22) A discretionary form of financing would be:
A) notes payable.
B) accounts payable.
C) accrued expenses.
D) none of the above.
Answer: A
Diff: 2
23) An increase in projected ________ will increase discretionary funds needed.
A) cash dividends
B) sales
C) retained earnings
D) both A and B
Answer: A
Diff: 2
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.
Answer: B
Diff: 2
10
25) Assume all else remains the same. Which of the following statements is true?
A) The lower a firm's profit margin, the more discretionary financing a firm will require.
B) The higher a firm's profit margin, the more discretionary financing a firm will require.
C) The lower a firm's profit margin, the more cash a firm will have to reinvest.
D) A relationship between a firm's profit margin and its requirement for external financing does
not exist.
Answer: A
Diff: 2
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
E) Accounts receivable
Answer: B
Diff: 2
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
E) The income tax rate
Answer: B
Diff: 2
11
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)
Answer: C
Diff: 2
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
E) A decrease in the firm's tax rate
Answer: C
Diff: 2
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
Answer: B
Diff: 2
31) Which of the following is a spontaneous source of financing?
A) Accrued expenses
B) Notes payable
C) Common stock
D) Paid-in capital
Answer: A
Diff: 2
Keywords: discretionary sources of financing
12
32) Swings in discretionary financing needed can be caused by:

A) firm profitability.
B) economic activity.
C) industry influence.
Answer: D
Diff: 2
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
Answer: B
Diff: 2
Use the following information and the percent-of-sales method to answer the following
question(s).
Below is the 2004 year-end balance sheet for Banner, Inc. Sales for 2004 were $1,600,000 and
are expected to be $2,000,000 during 2005. In addition, we know that Banner plans to pay
$90,000 in 2005 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, 2004
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
13
34) Banner's projected current assets for 2005 are:

A) $1,000,000.
B) $1,120,000.
C) $1,500,000.
D) $1,260,000.
Answer: B
Diff: 2
35) Banner's projected fixed assets for 2005 are:
A) $1,120,000.
B) $1,260,000.
C) $1,000,000.
D) $2,380,000.
Answer: B
Diff: 2
36) Banner's projected accounts payable balance for 2005 is:
A) $160,000.
B) $120,000.
C) $200,000.
D) $300,000.
Answer: C
Diff: 2
37) Banner's projected accrued expenses for 2005 are:
A) $120,000.
B) $160,000.
C) $100,000.
D) $200,000.
Answer: A
Diff: 2
14
38) Banner's projected long-term debt for 2005 is:

A) $700,000.
B) $880,000.
C) $380,000.
D) $300,000.
Answer: D
Diff: 2
39) Banner's projected retained earnings for 2005 are:
A) $260,000.
B) $280,000.
C) $340,000.
D) $350,000.
Answer: A
Diff: 2
40) Banner's projected discretionary financing needed for 2005 is:
A) $420,000.
B) $440,000.
C) $360,000.
D) $370,000.
Answer: B
Diff: 2
41) The projected change in retained earnings equals projected net income less any dividends to
be paid.
Answer: TRUE
Diff: 2
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
Diff: 2
15
43) The percentages used in the percent-of-sales method comes from pro forma financial
statements.
Answer: FALSE
Diff: 2
44) The percent-of-sales method is a commonly used method for estimating a firm's financing
needs.
Answer: TRUE
Diff: 2
45) Long-term financial plans must include capital expenditures.
Answer: TRUE
Diff: 2
46) One of the virtues of the percent-of-sales method is the precision of the estimate it provides
for future financing needs.
Answer: FALSE
Diff: 2
47) Holding all other variables constant, as the dividend payout ratio decreases, the sustainable
growth rate increases.
Answer: TRUE
Diff: 2
48) Pro forma statements provide single point estimates of each budgeted item.
Answer: TRUE
Diff: 2
16
49) Pro forma statements are important since they formally report the performance of the firm
during a previous reporting period.
Answer: FALSE
Diff: 2
50) When forecasting statements, assets always increase proportionately to sales regardless of
capacity.
Answer: FALSE
Diff: 2
51) The most commonly used method for making financial forecasts is the percent-of-sales
method.
Answer: TRUE
Diff: 2
52) It is common practice to develop optimistic and pessimistic scenarios when projecting
financial statements.
Answer: TRUE
Diff: 2
53) Discretionary sources of financing are those sources that vary automatically with a firm's
level of sales.
Answer: FALSE
Diff: 2
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
Diff: 2
17
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
Diff: 2
56) Because accounts payable and accrued expenses increase with sales, they represent sources
of spontaneous financing.
Answer: TRUE
Diff: 2
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 firms 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.
Diff: 2
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.
Diff: 2
18
59) The balance sheet of the Jackson Company is presented below:

Jackson Company Balance Sheet
March 31, 2004
(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, 2004, 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, 2005 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, 2005
Current assets $15.0 Accounts payable $7.5
Fixed assets 18.0
Notes payable
1.5
Total
$33.0
Long-term debt 12.0
Common equity 12.0
Total
$33.0
Diff: 2
19
60) Frog Hollow Bakery is a new firm specializing in all-natural-ingredient pastry products. In
attempting to determine what the financial position of the firm should be, the financial manager
obtained the following average ratios for the baking industry for 2004:
Common equity to total assets = 60%
Total asset turnover = 3 times
Long-term debt to total capitalization = 25%
Current ratio = 1.2
Quick ratio = .75
Average collection period (360-day year) = 10 days
Complete the accompanying pro forma balance sheet for Frog Hollow Bakery assuming 2005
sales (all credit) are $450,000.
Frog Hollow Bakery
December 31, 2005
Cash $
Current debt $
Accounts receivable
Long-term debt
Inventory
Total current assets
Common equity
Fixed assets
Total liabilities and equity $
Total assets
Answer:
Frog Hollow Bakery
December 31, 2005
Cash
$10,000
Current debt $30,000
Accounts receivable12,500 Long-term debt30,000
Inventory
13,500
Total current assets$36,000 Common equity90,000
Fixed assets
114,000
Total liabilities
Total assets
$150,000
and equity $150,000
Diff: 2
20
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
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
21
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
Diff: 2
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
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
Diff: 2
22
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.
Answer: C
Diff: 2
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
Answer: A
Diff: 2
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.
Answer: B
Diff: 2
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.
Answer: A
Diff: 2
23
5) Which of the following is always a non-cash expense?

A) Income taxes
B) Salaries
C) Depreciation
Answer: C
Diff: 2
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
Answer: A
Diff: 2
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.
Answer: D
Diff: 2
24
Table 1
Dorian Industries' projected sales for the first six months of 2004 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,
2004. 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 2004?
A) $400,000
B) $300,000
C) $100,000
D) ($60,000)
Answer: B
Diff: 2
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)
Answer: A
Diff: 2
25
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)
Answer: A
Diff: 2
11) Based on the information in Table 1, what is Dorian's projected cumulative short-term
borrowing as of April 30, 2004?
A) $15,000
B) $60,000
C) $35,150
Answer: D
Diff: 2
12) Based on the information in Table 1, what is Dorian's projected EBIT for March 2004?
A) ($10,000)
B) ($30,000)
C) $70,000
Answer: A
Diff: 2
26
Table 2
Fielding Wilderness Outfitters had projected its sales for the first six months of 2004 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, 2004 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, 2004. 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
Answer: A
Diff: 2
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
Answer: D
Diff: 2
27
15) Based on the information in Table 2, how much short-term financing is needed by March 30,
2004?
A) $110,000
B) $15,000
C) $70,000
D) $85,000
Answer: D
Diff: 2
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
Answer: B
Diff: 2
28
Table 3
Thompson Manufacturing Supplies' projected sales for the first six months of 2004 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, 2004 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, 2004. 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
Answer: B
Diff: 2
18) Based on the information in Table 3, what is Thompson's projected cumulative borrowing as
of March 1, 2004?
A) $85,000
B) $45,000
C) $70,000
D) - 0 Answer: C
Diff: 2
29
19) Based on the information in Table 3, what is Thompson's projected cash balance as of April
1, 2004?
A) $32,000
B) $4,300
C) $25,000
Answer: C
Diff: 2
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.
Answer: C
Diff: 2
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.
Answer: D
Diff: 2
30
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.
Answer: D
Diff: 2
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
Answer: C
Diff: 2
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
Answer: D
Diff: 2
31
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
Answer: C
Diff: 2
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
Answer: A
Diff: 2
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 breakeven point
Answer: C
Diff: 2
32
28) The cash budget consists of all the following factors EXCEPT:
A) cash receipts.
B) cash disbursements.
C) new financing needed.
D) net income.
Answer: D
Diff: 2
29) Depreciation expense is a deduction from cash flow in the cash budget.
Answer: FALSE
Diff: 2
30) The percent-of-sales method is more detailed than the cash budget method.
Answer: FALSE
Diff: 2
31) Depreciation expense is always included in the cash budget as it reflects the impact of fixed
asset purchases.
Answer: FALSE
Diff: 2
32) The cash budget can be used to provide an estimate of the firm's future financing needs.
Answer: TRUE
Diff: 2
33) The cash budget ignores discretionary financing.
Answer: FALSE
Diff: 2
33
34) A budget is a forecast of future events.

Answer: TRUE
Diff: 2
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.
Diff: 2
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.
Diff: 2
34
37) The cash budget for Parker Process Meats, Inc. for the fourth quarter of 2004 is given below:
Parker Process Meats, Inc.
Cash Budget for the Three Months Ending December 31, 2004
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 2004 for Parker.
Answer: Parker Processed Meats, Inc.
Pro Forma Income Statement
For the Quarter Ended December 31, 2004
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
Diff: 2
35
38) The treasurer for Brookdale Clothing must decide how much money the company needs to
borrow in July. The balance sheet for June 30, 2004 is presented below:
Brookdale Clothing Balance Sheet
June 30, 2004
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 2004
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
36
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 2005:
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 2005
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
Diff: 2
37

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Financial Management: Principles and Applications, 11e (Titman)

Chapter 17 Financial Forecasting and Planning

Principles: Principle 3: Cash Flows Are the Source of Value

9) The financial planning process is the responsibility of:

Principles: Principle 3: Cash Flows Are the Source of Value

Principles: Principle 3: Cash Flows Are the Source of Value

28) Which of the following is a source of external capital?

32) Swings in discretionary financing needed can be caused by:

34) Banner's projected current assets for 2005 are:

38) Banner's projected long-term debt for 2005 is:

59) The balance sheet of the Jackson Company is presented below:

17.3 Developing a Short-Term Financial Plan

5) Which of the following is always a non-cash expense?

34) A budget is a forecast of future events.

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