Chapter 11 : Forecasting Requirements

Because Liam's new restaurant had a high volume of sales, his inventory needs increased illustrating that a firm's asset needs are the primary force driving sales.

False

Bettina plans to draw an income from her new business but her personal living expenses are not needed in the financial plan unless these expenses are part of the capitalization of the business.

False

High-tech businesses (such as computer manufacturers) generally require fewer assets than service businesses.

False

Pro forma financial statements are statements that have been prepared in the proper format by a CPA.

False

The percentage-of-sales technique is an effective method for a new company to estimate asset requirements because asset-to-liabilities ratios tend to be relatively constant within an industry.

False

The term net working capital equals current assets less total liabilities and is a measure of a company's liquidity.

False

To be realistic, an entrepreneur should project profits only one year into the future.

False

Where should Rhonda put the administrative expenses for her business when she prepares the financial forecasts?

b. In the operating expenses section

David has a company decorating houses for the holidays. He has secured a $25,000 line of credit from his bank. For which purpose is David more likely to use this credit line?

b. labor to install the decorations in November

James is preparing his forecasts for the coming year. What kind of scenarios should he prepare when forecasting and budgeting?

b. most-likely and break-even case scenarios

Maria is projecting sales for her company for the upcoming new year. To be financially effective, she

b. should develop realistic sales projections.

Which action will be a concern for a prospective investor?

c. Inadequate provision for personal expenses of the entrepreneur

Verlin wants to avoid a common mistake often made by new entrepreneurs. What advice would you give him?

c. Make sure he has adequate financing

Yvonne is planning a coffee shop. The cost of producing the coffee should be included in the ________ section of the pro forma financial statement.

c. cost of goods sold

Alex wants to make sure he has enough liquid assets to pay his current bills. To do this, he should calculate his firm's:

c. current ratio.

Jake has prepared pro forma financial statements for his landscaping business. At the minimum, how often should he check results and make modifications as needed?

c. monthly

The method of forecasting asset requirements is called the ____________ technique.

d. percentage-of-sales

For the typical small firm, the primary source of equity capital for financing growth is

d. retained earnings.

As Willard's business grows and propsers, his company's total assets requirements will equal ___________.

d. spontaneous debt financing plus bank loans plus owner's investment plus retained earnings

Financial forecasts are required by lenders since they will want to know how they will be paid back; investors will use the forecasts to value the company.

True

The cash budget is concerned only with dollars received and dollars paid out.

True

The conventional measure of liquidity is the current ratio, which compares the current assets to current liabilities on a relative basis.

True

The projection of profits, asset requirements, financing requirements and cash flows are essential in determining whether a venture is economically viable.

True

To project pro forma financial statements, speaking to others in the industry and researching industry averages are good starting points.

True

Mark wants to make sure he does not run out of cash so he is preparing a monthly cash budget. After determining the percentage of cash collections by month, he should

a. estimate the amount and timing of cash disbursements.

Willar expects his new business to support him and his family. This means his asset and financing requirements will:

a. increase.

Tony operates a computer retail business. Based on the industry, how often should sales projections be for the company in projecting sales?

a. monthly for Year 1; annual for Years 2 and 3

A golf club should break down its annual cash budget into shorter time units because

a. of the seasonality of its sales.

The assets-to-sales relationship tends to be relatively constant within an industry, allowing for a(n) _____ technique to be utilized in projecting asset requirements.

a. percentage-of-sales

As her accounts payable and accrued expenses rose along with her firm's sales, Ariel noticed that ________ occurs.

a. spontaneous debt financing