D076 Unit 5 Practice Questions
What is one of the fundamental purposes of financial forecasting? -To estimate how changes in cost structures or sales will impact the future cash flows and financing needs of the firm -To understand the link between asset requirements and industry -To create accurate financial reports that summarize the company's financial performance for the previous period -To ensure that the future period's sales and costs will not exceed historical numbers
A
Which items are considered cash disbursements for a business? -Raw materials, rent, administrative expenses, interest, and selling expenses -Dividends, investments, cash sales, and tax liabilities -Cash sales and accounts receivable -Rent, accounts receivable, accounts payable, and raw materials
A
Which processes help you identify and fix problems in your budget? -Monitoring your budget allows you to identify problems, and then gradual revision and implementation of new processes allow you to fix those problems. -Revision allows you to identify problems in your budget, and then tracking allows you to fix those problems immediately so that you can then monitor progress. -Tracking allows you to identify problems, and then subsequent monitoring allows you to fix those problems. -When you spend too much in a category of your budget, you have identified a problem, which you can fix by increasing the allotted amount in that category for next month.
A
What are the three things one must determine before making a personal budget? -Expenses, interest payments, and savings -Income, expenses, and savings -Liabilities, income, and expenses -Tax liabilities, expenses, and income
B
What is the purpose of monitoring your cash flows? -Monitoring is used to identify the degree to which a business is leveraged so that the business can determine when it will be most profitable to repay outstanding loans. -Monitoring allows you to evaluate whether your actual cash flows are in line with your goals and to understand when correction or revision is needed. -Monitoring is the process by which firms prove to lenders that they have sufficient cash flow to pay back a short-term loan. -Monitoring allows you to implement changes to your budget gradually in such a way that the changes go smoothly and efficiently.
B
What is the sustainable growth rate (SGR)? -Accounts that do not vary with sales but are up to management's discretion -The growth rate that allows a firm to maintain its present financial ratios without issuing new equity -The external financing needed to meet the projected growth -Accounts that vary with the change in sales
B
You are a financial manager of a company, and you have projected sales increase for next year of 8%. Which action would you take when you conduct financial forecasting using the percent of sales method? -Leave the notes payable account constant in the projected financial statements. -Leave the cash account constant in the projected financial statements. -Change the long-term liabilities account in proportion to sales growth. -Change the notes payable account in proportion to sales growth.
B
How can a company reduce its discretionary financing needed (DFN)? -Reduce prices. -Increase the dividend payout. -Increase the net margin. -Reduce retention of earnings.
C
What are spontaneous accounts? -Accounts that are optional to include when creating a financial forecast -Accounts that do not vary with sales -Accounts that vary naturally with sales -Accounts that are left to management's discretion
C
What is the rate at which a firm can grow without issuing new equity? -Discount rate -Retention rate -Sustainable growth rate -Internal rate of return
C
What three things should be included in a cash budget for a business? -Cash receipts, cash disbursements, and savings -Income, expenses, and savings -Cash receipts, cash disbursements, and borrowing -Sales, expenses, and borrowing
C
Which account is a discretionary account? -Accounts receivable -Cash -Notes payable -Fixed assets
C
Which process is Li engaging in if he recently made a personal budget and is now keeping a record of his cash flows? -Forecasting -Revising -Tracking -Monitoring
C
Which type of account does not vary with sales and is left to management's discretion? -Spontaneous accounts -Fixed assets accounts -Non-spontaneous accounts -Accounts receivable accounts
C
Which type of expense is a magazine subscription? -Asset expense -Monitored expense -Variable expense -Fixed expense
C
In what situation might the software method of tracking be preferable to the spreadsheet method of tracking? -When a person has a lot of free time and likes to record each cash flow by hand -When a person prefers to use cash to make purchases and is very good about remembering to track cash flows -When a person needs cash flow information for tax purposes -When a person has a hard time remembering to record their cash flows and when they prefer to use a card to make purchases
D
When can the discretionary financing needed (DFN) be determined? -After total financing need is determined -After total revenue, alone, is projected -After total revenue and expenses are projected -After pro-forma financial statements are forecasted using the percent of sales method
D
Which action increases a company's sustainable growth rate (SGR)? -Decreasing profitability -Decreasing the leverage the company uses -Decreasing asset use efficiency -Decreasing dividend payout
D
Company ABC would like to continue to grow, but in order to maintain control of all decisions and ownership, it wants to avoid issuing new stock. Which calculation will show the company's leadership the fastest that ABC can grow? -Sustainable growth rate -Key growth indicator -Discretionary financing needed -Return on equity
A
Freedom Rock Bicycles has a sales capacity of $10 million. When sales exceed this capacity, the company must invest $200,000 in new equipment. Freedom Rock Bicycles had sales of $9 million in one year, and it projects a sales growth of 10%. The net fixed assets in the year were $500,000. By how much will the company's discretionary financing need increase? -$0 -$50,000 -$200,000 -$900,000
A
How can a firm grow its fixed assets if it is expecting growth but has reached capacity with its fixed assets? -Invest a substantial amount of money at one time to increase capacity. -Use the percent of sales method to forecast fixed assets. -Increase the net margin. -Continue to invest in capital through small increments over time.
A
Jack works for a company that manufactures televisions and must obtain financing to increase the company's inventory levels. Jack's manager knows that current investment markets are tight, and it may be difficult for the company to obtain additional financing for the next year. The manager asks Jack to propose a way for the firm to reduce its discretionary financing needed (DFN). What should Jack suggest to reduce next year's DFN? -Lower the amount of dividends that are paid out to shareholders next year -Lower the net margin by decreasing the sales prices and maintaining current costs -Increase the amount spent on fixed assets to increase production capacity -Increase sales growth, resulting in a larger amount of revenue coming into the firm
A
What are the three main uses of cash budgets? -Cash budgets are used to forecast future financial need, aid in performance evaluation, and show when corrective action is needed. -Cash budgets show lenders how effective the management of a business is, allow for corrective action when needed, and increase a firm's degree of leverage. -Cash budgets help companies know how much to invest in capital, aid in expense tracking, and predict when additional financing is needed. -Cash budgets allow periodic performance evaluation, inform investors of changes in net income, and allow businesses to gain access to credit.
A
What are three principles of budgeting that are important to know before beginning the budgeting process? -Keep records; develop savings, income, and expense strategies; and use a method that meets your needs and objectives -Improve your credit score; understand the key areas of savings, income, and expenses; and categorize all expenses -Know yourself, reduce variance in spending, and consult a certified financial advisor -Eliminate debt, evaluate your personal financial performance, and consult a certified financial advisor
A
What is the difference between tracking and monitoring cash flows? -Monitoring involves using your tracking record to evaluate cash flows against your target, identify patterns and changes in cash flows, and gauge when correction is needed. -Tracking involves using your monitoring record to verify cash flows against your goals, discover changes and patterns in cash flows, and understand when correction may be needed. -Monitoring is revising your budget, whereas tracking is identifying patterns and changes in your cash flows. -Tracking involves using envelopes or computer programs to record cash flows, whereas monitoring involves evaluating cash flows by hand.
A
What is the envelope method of budgeting? -Withdrawing cash at the beginning of the period and then allowing only a certain amount to be available for each category of spending -Tracking your credit and debit expenditures by updating and categorizing purchases that appear on your bank statement -Paying all expenses during the month by check through the physical mailing system to ensure that obligations are met in a timely manner -Using a spreadsheet to track both your digital and physical expenditures of cash during the month
A
What role does financial forecasting play in the future success and growth of a firm? -Financial forecasting supplements historical data with proposed investments or changes to allow for more accurate foresight. -Financial forecasting looks backward to provide historical data that informs future operations. -Financial forecasts are much less important than cash budgets because cash budgeting is the only essential tool a firm needs to attain long-term success. -Financial forecasts are only moderately useful because predicting the future is impossible.
A
Which action decreases the discretionary financing needed (DFN)? -Increasing the plowback ratio -Decreasing the net margin -Decreasing the retention ratio -Increasing the payback ratio
A
Which action would help you make your budget more efficient? -Compare your budgeted cash flows to your actual cash flows, and then revise the budget if necessary. -Reduce your payments toward savings so you have enough for monthly expenses. -Every month, increase the allotted amounts for each category of your budget. -Create only two categories for expenses: necessary and unnecessary.
A
Which question is answered by financial forecasting? -How much financing will the firm need in the future? -How will an increase in the firm's tax rate affect the firm's net income? -What is the firm's current market share? -Which product will produce the most in sales over the next year?
A
You are a financial manager of a company. The marketing department has informed you that the projected sales growth for the upcoming year is 10%. As you conduct financial forecasting, you keep the long-term liabilities the same amount as the previous year and will discuss this account with the other managers later. What type of account is long-term liabilities? -Discretionary account -Spontaneous account -Projected asset account -Projected owners' equity account
A
A company is developing a financial forecast for the next year. The company plans to implement a new factory that will increase production and resulting sales by 20%. Since the company's assets are increasing significantly, what else must increase? -Gross margin -Financing -Profit turnover -Accounts receivable turnover
B
A firm is currently operating at 75% capacity with current sales of $34 million. Will the firm need to acquire additional fixed assets if its sales are predicted to increase by $6 million next year? -No, because the increase in sales will exceed the firm's sales capacity. -No, because the increase in sales will not exceed the firm's sales capacity. -Yes, because the increase in sales will not exceed the firm's sales capacity. -Yes, because the increase in sales will exceed the firm's sales capacity.
B
What are long-term financial forecasts used for? -Cash budgeting -Making investment and financing decisions -Developing savings, income, and expense strategies -Determining short-term operating needs
B
What are the benefits of using the traditional envelope method to track cash flows? -It requires users to carefully track specific expenses and write down their income and spending for the month. -It is simple and helps ensure that users do not spend more than the cash that they have available. -It automatically separates expenses into categories so users can quickly assess their purchases during the month. -It enables users to connect bank and credit card accounts to automatically update income and expenses.
B
What does the sales capacity equation tell you? -The minimum amount of fixed assets required to support current sales -How much room a firm has to grow without additional investment in fixed assets -How much the firm can grow without issuing new equity -The limit for a firm's sales growth
B
What is discretionary financing needed (DFN)? -The additional projected owners' equity needed given a firm's expected future growth -The additional financing needed given a firm's expected future growth -The total projected assets needed given a firm's expected future growth -The total projected liabilities needed given a firm's expected future growth
B
What is the correct order of the three steps necessary to create a cash budget? -Estimate cash disbursements, predict expenses, create the cash budget -Determine cash receipts, estimate cash disbursements, create the cash budget -Create the cash budget, determine cash receipts, estimate cash disbursements -Evaluate income, create the cash budget, estimate cash disbursements
B
What is the main reason why it is important to track and record cash flows? -Tracking cash flows is the main process by which a person can calculate the return they are receiving on their investments. -Tracking your cash flows allows you to recognize where and how your money is spent so you can monitor your cash flows and revise your budget as needed. -Tracking cash flows is important because it is impossible to refinance a loan without tracking your income and expenses. -Tracking your cash flows allows you to increase your annual income by knowing your previous income.
B
What three things should an individual or company be doing so that their budget is effective and so that they are on track to meet their financial goals? -Reduce variable costs, account for income, and monitor outstanding loans -Track cash flows, monitor cash flows, and revise the budget -Monitor cash flows, reduce variable costs, and track expenses -Revise the budget, categorize investments, and track income
B
Which account should be looked at first when examining capacity constraints to determine whether the discretionary financing needed (DFN) can be reduced? -Accounts receivable -Fixed assets -Notes payable -Long-term debt
B
Which method is most commonly used for determining a company's DFN? -Historical regression -Percent of sales -Sustainable growth rate -Company multiples
B
Which tool is forward-looking and thus helps decision makers understand how actions taken today can affect their firm's future performance? -Accounting -Financial forecasting -Ratio analysis -Financial statements
B
Why are financial models helpful in financial forecasting? -Models are required by the SEC when a firm plans to issue additional stock on the public market. -Models allow users to see the complex relationships between sales and other aspects of the business. -Models provide credibility to a firm's financial statements for government agencies to review. -Models show the future supply schedule for a firm, which allows for negotiation with suppliers.
B
Why are sales not strictly considered to be the same thing as cash receipts? -Sales are not liquid enough to be considered a form of cash flow. -Sales include both cash sales and credit sales. -Sales include expenses outside of the cash budget. -Sales are not measured on a monthly basis and thus cannot be included in a cash budget.
B
Why is "put $50 in a savings account each month for Christmas gifts" a better budgeting goal than "save money for Christmas gifts"? -Because "save money for Christmas gifts" is unattainable -Because it is specific and measurable -Because it demonstrates a knowledge of the correct steps of cash budgeting -Because $50 is a realistic amount to save each month
B
An employee was recently hired as a financial analyst and asked to create a cash budget for the employee's division for the next year. Which component should the employee exclude from the budget -Payments to suppliers that will be made over the next six months -Purchase of inventory for sales that the employee will make this year -Purchase of equipment that will be bought in three years -Payment toward the line of credit that is due next month
C
How far into the future do cash budgets usually forecast? -Between one and two weeks -Between one and three years -Between one month and one year -Between five and ten years
C
If a company expects sales to grow by 10% next year, which account might also increase by 10%? -General business insurance -Headquarters utilities -Cost of goods sold -Training budget for senior employees
C
Why would a monthly mortgage payment be considered a fixed expense? -Because you have control over the amount you pay each month -Because the bank changes the payment amount each month -Because the payment is the same amount each month -Because the payments vary based upon the cost of the house
C
A company calculated variances of a budget and actual cash flows that indicate the firm's strengths and weaknesses in cash flows and its budgeting process. Which major use of cash budgeting is this an example of? -Corrective action -Standardization -Assessment of future needs -Performance evaluation
D
A firm had sales of $100,000 this month. However, the firm received only $90,000 in cash from sales. Why would the firm receive $10,000 less cash than its monthly sales? -Because the firm paid down $10,000 on a loan -Because the firm paid cash for inventory purchased -Because the firm purchased inventory on credit this month -Because the firm did not make all sales on cash
D
How do the benefits of knowing the cash position for each period differ between businesses and individuals? -Knowing the cash position allows individuals to recognize when short-term loans are needed, while it allows business to know when to repay their vendors. -Knowing the cash position allows businesses to know how much to invest each month, while it allows individuals to know how much to save each month. -Knowing the cash position allows businesses to evaluate long-term cash accumulation, while it allows individuals to analyze loan balances. -Knowing the cash position allows businesses to recognize when short-term loans are needed, while it allows individuals to analyze progress toward their personal financial goals.
D
How does financial forecasting help with financial decision-making? -It helps decision makers see a detailed map of the future performance of the firm. -It helps managers analyze how the firm has been performing over the past several years. -It helps managers understand what key assumptions to make for the future. -It helps decision makers understand the impacts of today's actions on the future performance of the firm.
D
Jerry wants to begin budgeting his money. What are three principles that he should know before beginning the budgeting process? -Know yourself; transfer long-term debt to short-term debt; and develop savings, expense, and income strategies. -Track expenses categorically, use the most updated method of budgeting, and eliminate consumer debt. -Make eliminating consumer debt a priority, only use the budgeting strategies that are approved by GAAP, and track expenses categorically. -Keep records; understand the key areas of savings, expenses, and income; and eliminate consumer debt.
D
W&H Company wants to create a cash budget to better manage its cash flows. The financial manager knows that the firm's labor costs and materials costs are too high for the level of sales each month. The firm also needs to keep better track of its cash flows to assess its need for additional financing through short-term loans. After W&H Inc. has developed a cash budget, what should the company do in the following months? -It should invest any profits in new capital. -It should begin tracking its cash inflows and outflows. -It should wait until the budgeted months are over and then make a new budget for the months following. -It should monitor its actual cash flows and then revise the cash budget if needed.
D
W&H Company wants to create a cash budget to better manage its cash flows. The financial manager knows that the firm's labor costs and materials costs are too high for the level of sales each month. The firm also needs to keep better track of its cash flows to assess its need for additional financing through short-term loans. W&H Inc.'s labor costs each month are an example of which item in a cash budget? -Cash receipt -Minimum cash need -Net cash for the month -Cash disbursement
D
W&H Company wants to create a cash budget to better manage its cash flows. The financial manager knows that the firm's labor costs and materials costs are too high for the level of sales each month. The firm also needs to keep better track of its cash flows to assess its need for additional financing through short-term loans. Why would creating a cash budget be useful for W&H if the firm needs a loan from the bank or another short-term lender? -Cash budgets allow businesses to seek financing from multiple lenders at a time, increasing borrowing capabilities. -Cash budgets help lenders identify a business's investing strategy going forward, establishing confidence in future operations. -Cash budgets increase the lender's trust in a firm by demonstrating the firm's ability to make profits and repay loans. -Cash budgets include a detailed credit report of the business's operations, which proves that the company can use borrowed funds responsibly.
D
What does the discretionary financing needed (DFN) tell us? -The total amount of owners' equity that a firm is projected to have -The total amount of liabilities that a firm is projected to have -The total amount of investment needed for future years -The total amount of funding that management will need to obtain through discretionary financing sources
D
What is the goal of financial forecasting? -To provide a detailed map of a firm's future -To project sales so investors can adjust stock prices -To project net income and dividends for a firm -To understand the implications of today's decisions on tomorrow's performance
D
What is the major purpose of financial forecasting? -To produce a short-term budget for a company or individual -To make operational changes within a company -To show the company's growth over the past several years -To inform a company how business decisions will impact future growth
D
What is the term for the rate that allows a firm to maintain its present financial ratios without issuing new equity or increasing debt? -Steady state growth rate -Sales growth rate -Capital growth rate -Sustainable growth rate
D
When evaluating a company's performance, what can variances on a company's cash budget indicate? -Variances show that expenses were necessarily greater than income for the budget horizon. -Variances are expected and should never pose a concern for management. -Variances are not useful for performance evaluation of certain managers or divisions. -Variances show that certain managers or divisions are not meeting targets.
D
Which item is an example of a cash receipt in a personal budget? -A payment of $125 for an annual doctor's visit -A purchase of $53 for groceries and toiletries for the week -A ski pass worth $65 that your roommate gives you in exchange for borrowing your car -A graduation gift of $100 from your grandmother
D
Which item represents an example of a cash disbursement a business might have this month? -A purchase of inventory on credit that will be paid off next month -Interest earned on bank deposits held by the firm. -A collection of accounts receivable on sales made last month -A rent check paid and cashed for the warehouse the company uses
D
Which type of account changes with sales growth? -Fixed assets accounts -Discretionary accounts -Non-spontaneous accounts -Spontaneous accounts
D
Why do fixed assets increase as a lump sum instead of in proportion to sales growth? -A firm needs more fixed assets only when the DFN is negative. -A firm purchases fixed assets in proportion to sales. -A firm will outsource production until it can use an entire production facility. -A firm must purchase an entire fixed asset rather than just the portion needed to increase production.
D
You are conducting financial forecasting for your firm given the projected sales. What are you doing if you are estimating changes in the balance sheet based on the predicted change in sales? -Projecting discretionary accounts -Determining total financing need -Calculating retained earnings -Forecasting spontaneous accounts
D
