Chapter 18 Forecasting
Sales from a company's products and services are the only source of cash inflow.
Answer: FALSE Comment: Although sales from a company's products and services will usually be the main source of cash inflow, other activities can generate cash receipts. For example, companies can generate cash by selling equipment or other assets.
Cash disbursements (expenditures) are not closely tied to the sales forecast as the sales forecasts are not typically used for scheduling production.
Answer: FALSE Comment: Cash disbursements (expenditures) ARE CLOSELY tied to the sales forecast as the sales forecasts ARE TYPICALLY used for scheduling production
Pro forma statements are tools used by the company to monitor its profitability and obligations for the previous and/or current year year.
Answer: FALSE Comment: Pro forma statements are tools used by the company to forecast its profitability and obligations for the coming year.
Pro forma statements are tools used by the company to help highlight areas that the company needs to avoid as part of its short-term financial planning.
Answer: FALSE Comment: Pro forma statements are tools used by the company to help highlight areas that the company needs to MONITOR as part of its short-term financial planning.
Products, but not services, need to be available to customers at the time customers need them.
Answer: FALSE Comment: Products AND SERVICES need to be available to customers at the time customers need them.
Sales made and actual cash received may differ for any particular month. However, sales and cash received must be equal for a calendar year.
Answer: FALSE Comment: There is no need nor expectation that these two values be the same in any particular year.
A financial manager needs to know if any of the credit sales will not be paid by customers. This situation will entail a reduction in the estimate of the cash flow due to "bad debts."
Answer: TRUE
A line of credit is unsecured, that is, there is no pledge of specific assets backing the loan. But companies can pledge assets against borrowed funds. These are called secured loans.
Answer: TRUE
A pro forma statement uses the prior year's financial statements to find the relationship or relative percentage of each line (accounting category) to either the sales revenue or the total assets of the firm.
Answer: TRUE
For a firm, bank loans can be a source of cash and interest payments to the bank can be a use of cash.
Answer: TRUE
For estimating cash budget timing, the sale of equipment might occur in one month and the tax consequence in another month.
Answer: TRUE
In accounting, the recording of the cost of goods sold occurs at the time of the sale, but the cash flow may take place over an extended time period.
Answer: TRUE
Often a bank will require a company to pay off its line of credit (return the balance to zero) and keep it there for a specific period of time each year. For example, a requirement might be that the line of credit remains at a zero balance for at least one sixty-day period each year. This is called the clean-up period.
Answer: TRUE
Once all the expenditures and receipts are determined, a financial manager can determine the probability of cash excess or cash shortfall in upcoming periods.
Answer: TRUE
One method a company may handle a cash shortfall is to draw cash from savings.
Answer: TRUE
Pro forma statements are tools used by the company to forecast its profitability and obligations for the coming year.
Answer: TRUE
When estimating the impact of a capital project on a pro forma balance sheet, one should note that financing can come from a variety of sources. The resources can include new debt, increases in current liability accounts, and cash retained through operations.
Answer: TRUE
Financial forecasts are seldom right on the money, so to speak, but they do provide a yardstick by which a company can measure ________.
A) its past adherence to its long-term plan B) its past deviation from its long-term plan C) its adherence to or deviation from its short-term plan D) its current deviation from its future plan Answer: C
If the company has some fixed costs, as sales increase then a ________ of sales dollars flows to the bottom line if these costs are truly fixed and do not vary with production or sales.
A) lower percentage B) higher percentage C) equal percentage D) much lower Answer: B
Excess cash is an asset that has a(n) ________ due to lost earning power for the company.
A) opportunity cost B) cash cost C) sunk cost D) erosion cost Answer: A
Short-term decisions are viewed as decisions that have short-term impacts and can be changed or modified at ________.
A) relatively low costs B) relatively high costs C) relatively high time requirements D) relatively low costs with high time requirements Answer: A
The ________ schedule will usually be based on the ________ forecast.
A) sales, production B) production, sales C) forecast, scheduled D) production, cash Answer: B
As with a lot of planning, the financial forecast begins with ________ estimates and ________ schedules.
A) sales, production B) sales, profit C) dividends, production D) profits, dividend Answer: A
In the daily planning for cash or the cash forecast, we want to hone in on the management of cash as it applies to the ________ of the company.
A) short-term borrowing and long-term investing B) long-term borrowing and short-term investing C) short-term borrowing and short-term investing D) long-term borrowing and long-term investing Answer: C
An aspect of ________ is forecasting operating cash flow and ultimately the profitability of the company in the coming period.
A) short-term financial planning B) medium-term financial planning C) long-term financial planning D) short-term financial investing Answer: A
There are a variety of ways to produce pro formas, but they usually rely on two primary inputs. One of these primary inputs is ________.
A) the projected sales for the coming year B) the projected sales for the past year C) next year's financial statements D) this year's financial statements Answer: A
There are a variety of ways to produce pro formas, but they usually rely on two primary inputs. One of these primary inputs is ________.
A) the projected sales for the current year B) the projected sales for the past year C) the prior year's financial statements D) this year's financial statements Answer: C
It is ________ of cash flow that is important to the financial manager.
A) the timing and amount B) just the timing C) the timing but not the amount D) just the amount Answer: A
Managers in charge of short-term cash outflow direct their attention to cash management as it pertains to the operations of the firm, much as ________.
A) they do with their daily cash needs B) they do with their long-term cash needs C) they do with their capital budgeting needs D) All of these Answer: A
One of the functions of a finance manager is ________.
A) to forecast for the coming period B) to forecast for the present period C) to forecast for the past period D) to forecast for the present and future periods Answer: A
To estimate the firm's potential performance for the coming year, we typically start with the sales forecast from the ________ and prepare a pro forma income statement using the percentages of the ________ for each category.
A) finance department, prior year B) marketing department, prior year C) marketing department, next year D) sales department, current year Answer: B
Forecasting entails drawing a financial picture of a company for the ________.
A) year B) month C) quarter D) All of these Answer: D
Depreciation tends to ________ each year with the Modified Asset Cost Recovery System (MACRS) when sales go up.
A) go up B) remain the same C) increase exponentially D) go down Answer: D
A pro forma statement sets out the financial predictions of a company on an ________ basis--that is, it projects future performance based on a set of operating and sales assumptions.
A) "all or nothing" B) "as if" C) "as matter of fact" D) All of these Answer: B
Which of the statements below is FALSE?
A) A company can take a simple approach to estimating next year's growth in revenue by taking just the prior year's growth rate. B) A company can take a simple approach to estimating next year's growth in revenue by having a number of departments supply input. C) A company can take a simple approach to estimating next year's growth in revenue by using the average dollar increase in sales from the past two years. D) A company can take a simple approach to estimating next year's growth in revenue by averaging the previous two years' annual growth rates. Answer: B
Which of the statements below is TRUE?
A) A company's average cost of installing its product for a customer is an example of internal data. B) A company's success rate in getting contractors to use its product is an example of external data. C) A marketing department's discovery of published data related to its industry from another country is an example of internal data. D) A marketing department's discovery of published data related to its product from another state is an example of internal data. Answer: A Comment: A company's success rate in getting contractors to use its product is an example of INTERNAL data. A marketing department's discovery of published data related to its industry from another country is an example of EXTERNAL data. A marketing department's discovery of published data related to its product from another state is an example of EXTERNAL data.
Which of the statements below is FALSE?
A) A key element in a sales forecast is that the timing of the sale and the cash inflow from the sale often happen at different times. B) The amount and timing of sales are usually provided by the finance department. C) We start the process of building a cash forecast with predicting the cash inflow from future sales: a sales forecast. D) The time when a sale is recorded is often different from the time cash is actually received. Answer: B Comment: The amount and timing of sales are usually provided by the SALES or MARKETING department.
Which of the statements below is FALSE?
A) A simple monthly cash flow estimate allows managers to anticipate periods when the company may need to borrow and periods when the company will have excess cash for investing. B) There is a problem in managing cash if sales are low for several months, causing a negative balance and delaying payments to suppliers or employees. C) There are four basic ways to handle cash surpluses: Savings; Unsecured Loans (Commercial Paper, Trade Credit, or Banker's Acceptance) ; Secured Loans (Using Accounts Receivable or Inventories); and Other Sources (Letters of Credit). D) By far the simplest way to cover a cash deficit is to take money out of one's savings account--provided, of course, that one has sufficient savings to cover the necessary transfer. Answer: C
The amount of sales a company predicts is a function of two types of data. Which of the types below is one of these two types?
A) Accounting data B) Internal data C) Rationing data D) Legal data Answer: B
________ consists of items such as the current interest rates, housing starts, gross national product (GNP), disposable income estimates, or other economic indicators.
A) Accounting data B) Internal data C) External data D) Financial data Answer: C
We can condense the items that require cash outflow into basic categories. Which of the below is a basic category?
A) Accounts payable for materials and supplies B) Capital expenditures C) Wages, taxes, and other operating expenses of the business D) All of these Answer: D
Which of the below is a SOURCE of cash?
A) Cash Sales B) Wages and Salaries C) Rent or Lease payments D) Dividend payments Answer: A
Which of the statements below is TRUE?
A) Cash collections are closely tied to the sales forecast as the sales forecasts are typically used for scheduling production. B) Financing costs include the wages paid to workers, the raw materials for manufacturing products, the overhead (such as electricity, water, plant space, and so on), and the shipping costs that get the product to the customer. C) Once all the expenditures and receipts are determined, a financial manager can determine the exact cash excess or cash shortfall in upcoming periods. D) It is the timing and the amount of cash outflow from production that is important to the financial manager and estimating this amount is part of the cash forecasting process. Answer: D
Which of the statements below is FALSE?
A) Cash disbursements (expenditures) are closely tied to the sales forecast as these forecasts are typically used for scheduling production. B) Production costs include the wages paid to workers, the raw materials for manufacturing products, the overhead (such as electricity, water, plant space, and so on), and the shipping costs that get the product to the customer. C) Once all the expenditures and receipts are determined, a financial manager can determine the exact cash excess or cash shortfall in upcoming periods. D) It's the timing and the amount of cash flow that is important to the financial manager and estimating these cash outflows is part of the cash forecasting process. Answer: C
Which of the below is a USE of cash?
A) Credit Sales B) Retirement of debt (paying off loans and bonds) C) Bank loans D) Cash sales of equipment or other assets of the company Answer: B
In short-term cash management as it pertains to the operations of the firm, which of the below is NOT one of the general objectives?
A) Determining the cash surplus B) Determining the job satisfaction level of employees C) Determining the money the company can invest D) Determining the cash deficit Answer: B
________ consists of items such as number of sales personnel in the field and average sales per representative, competitors and alternative products, and production capabilities and schedules as well as other factors known mainly to the company.
A) External data B) Product data C) Employee data D) Internal data Answer: D
Which of the below does a pro forma statement tell us?
A) For every sales dollar, it tells us what percentage went to produce the product. B) For every dollar in cost, it tells us what percentage ends up as net income. C) For every sales dollar, it tells us how much shareholders received in stock splits. D) Pro forma statements provide the information identified in all of the above choices. Answer: A
Which of the below does a pro forma statement tell us?
A) For every sales dollar, it tells us what percentage went to produce the product. B) For every sales dollar, it tells us what percentage ends up as net income. C) For every sales dollar, it tells us how much shareholders received in dividends. D) Pro forma statements provide the information identified in all of the above choices. Answer: D
There are two primary tools used to forecast and set in action a company plan. Which of the tools below is one of these?
A) Statements of retained earnings B) Profit budgets C) Income statements D) Pro forma statements Answer: D
The timing and the amount of cash flow is important to the financial manager and estimating these cash outflows is part of the ________ process
A) income forecasting B) revenue forecasting C) cash forecasting D) cost forecasting Answer: C
As applied to the balance sheet statement, which of the statements below is FALSE?
A) The company looks at the prior year's balance sheet and finds each line's percentage of total assets. B) The company forecasts the coming year's total assets based on expected changes such as the completion of capital projects, desired levels of certain accounts such as cash and inventories, and additional borrowing for dividend purposes. C) If a large capital project will be completed in the coming year and the Plant, Property and Equipment line will grow significantly, its percentage of total assets should increase. D) Financing a capital project may require additional debt financing, causing the percentage of long-term debt to rise above its prior year's percentage of total assets. Answer: B
Which of the statements below is FALSE?
A) The marketing department finds published data related to its product from another state. This is an example of internal data. B) Once the sales estimate is in, the finance manager must estimate the cash flow from these sales in terms of timing. C) A company's average cost of installing its product for a customer is an example of internal data. D) A company could take a simple approach to estimating revenue for the upcoming year by simply averaging the two previous growth rates; taking just the prior year's growth rate; or, using the average dollar increase in sales from the past two years. Answer: A Comment: The marketing department finds published data related to its product from another state. This is an example of EXTERNAL data
Which of the statements below is FALSE?
A) The ultimate goal of cash management is to have sufficient cash on hand to meet business obligations in a timely and appropriate manner. B) Although the cash-management process will usually start with inventory forecasting, managers will look at the "final product" first to get an idea of where the company is ultimately heading and why it needs to look at sales forecasts and production schedules. C) The cash forecast is the analytical tool that estimates the future timing of cash inflow and that projects potential shortfalls and excess. D) The amount of inventory can be changed with the next order if a product's sales are faster or slower than originally anticipated. Answer: B Although the cash-management process will usually start with SALES forecasting, managers will look at the "final product" first to get an idea where the company is ultimately heading and why it needs to look at sales forecasts and production schedules.
Which one of the costs below is NOT a production cost?
A) The wages paid to workers B) The raw materials for manufacturing products C) The dividends paid to shareholders D) The shipping costs that get the product to the customer Answer: C
We can condense the items that require cash outflow into basic categories. Which of the below is a basic category?
A) Wages (but not commissions) B) Accounts receivable C) Long-term financing expenses (interest payments, dividend payments, issuing costs of debt and equity) D) All of these Answer: C
Which of the statements below is FALSE?
A) We can separate short-term and long-term decisions into three dimensions: the length of impact, the cost, and the degree of information gathering prior to the decision. B) The longer the impact and the higher the cost associated with a decision, the greater the time and degree for gathering information on choices and the more complex the decision model. C) Long-term decisions are called capital budgeting decisions and are typically viewed as decisions that have long-term impacts that are not easily reversed or that can be changed only at great cost. D) An example of a short-term decision is determining the number of manufacturing facilities that the firm should operate. Answer: D Comment: An example of a LONG-TERM decision is determining the number of manufacturing facilities that the firm should operate.
Which of the statements below is FALSE?
A) We use the prior year's financial statements to find the relationship or relative percentage of each line (accounting category) to either the sales revenue or the total assets of the firm. B) Forecasted accounting statements are called pro formas for short. C) We use the projected sales for the past year as the starting point for all the income statement lines. D) Forecasted accounting statements are called pro forma financial statements. Answer: C Comment: We use the projected sales for the COMING year as the starting point for all the income statement lines.
We start the process of building a cash forecast with predicting the cash inflow from future sales. This is called ________.
A) a sales forecast B) a cash forecast C) a monetary forecast D) a revenue forecast Answer: A
The amount and timing of sales are usually provided by the ________ department.
A) advertising or finance B) accounting or sales C) sales or marketing D) marketing or planning Answer: C
An aspect of short-term financial planning is forecasting operating cash flow and ultimately the profitability of the company in the coming period. This type of financial planning typically uses forecasted ________.
A) balance sheets B) income statements C) statements of cash flow D) All of these Answer: D
An adjustment in the pro forma statement may be necessary for ________ expenses in line with known changes to these expenses that may not correspond directly with sales or production.
A) cash B) credit C) selling, general, and administrative D) cash and credit Answer: C
Managers know that for cash and credit sales completed in one month that all will be recorded as sales revenue in that month, but that the actual cash flow will take place over a longer period of time because of ________.
A) credit sales B) erosion C) foreclosure D) transit time Answer: A
Based on the sales forecast, the finance manager estimates the receipt of cash based on cash and ________.
A) credit sales B) inventory sales C) accounts receivables D) net income Answer: A
An aspect of short-term financial planning is forecasting operating cash flow and ultimately the profitability of the company in the coming period. This type of financial planning typically uses forecasted ________.
A) earnings B) income statements C) working capital statements D) All of these Answer: B
The goal of the daily management of cash is to have sufficient cash on hand to pay the bills without carrying ________.
A) excess debt B) excess sunk costs C) excess depreciation D) excess cash Answer: D
Cash disbursements or ________ are closely tied to the sales forecast as the sales forecasts are typically used for scheduling production.
A) expenditures B) receipts C) revenues D) sales Answer: A
A line of credit does not resemble a personal credit card.
Answer: FALSE
A marketable security is an unsecured bank loan whereby the bank agrees to lend a company up to a specific amount of cash, at the discretion of the company.
Answer: FALSE
Banker's acceptances are financial assets sold by a company directly to investors, like bonds and common stock, but with very short maturity dates, while commercial paper is for self-liquidating inventories.
Answer: FALSE
A SOURCE of cash is utility payments.
Answer: FALSE Comment: A USE of cash is utility payments
A line of credit is a secured bank loan whereby the bank agrees to lend a company up to a specific amount of cash, at the discretion of the company. In other words, it is just a pre-arranged loan.
Answer: FALSE Comment: A line of credit is an UNSECURED bank loan whereby the bank agrees to lend a company up to a specific amount of cash, at the discretion of the company. In other words, it is just a pre-arranged loan.
A pro forma statement sets out the financial predictions of a company on an "as if" basis — that is, it projects future performance based on a set of operating and sales facts.
Answer: FALSE Comment: A pro forma statement sets out the financial predictions of a company on an "as if" basis — that is, it projects future performance based on a set of operating and sales ASSUMPTIONS.
A USE of cash is interest payments received.
Answer: FALSE Comment: A use of cash is interest payments MADE