Financial Planning Ch16 Complete Test Bank

Chapter 16 – Financial planning

MULTIPLE CHOICE

1. A sales forecast that relies heavily on macroeconomic and industry forecasts is called a:

REF: 16.2 Planning for Growth NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

2. The short-term financing strategy that involves a company relying heavily on short-term borrowing to finance a portion of its long-term growth is called a(n):

REF: 16.3 Planning and Control NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

3. The statement of a company’s planned inflows and outflows of cash is called a(n):

REF: 16.3 Planning and Control NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

4. A(n) ­­__________ enables a company to grow without issuing new ordinary shares while maintaining a constant total asset turnover and equity multiplier.

REF: 16.2 Planning for Growth NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

5. The method in which pro forma statements are constructed by assuring that all items grow in proportion to sales is called the:

REF: 16.2 Planning for Growth NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

Use the following information to answer questions 6 to 10.

6. Based on the percentage-of-sales method, what will be Smith’s net income if sales are expected to increase by 20%?

New sales = 540

New costs = 540(180/450) = 216Taxable income = 324

Taxes = 110.16

New net income = 324 – 110.16 = 213.84

PTS: 1 DIF: E

REF: 16.2 Planning for Growth NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

7. Smith pays out 20% of its projected net income as dividends. If sales grow by 20% and all items on the income statement grow proportionally with sales, what will be the company’s addition to retained earnings?

New net income = 213.84

Addition to retained earnings = 222.75(1 – 0.20) = 171.07

PTS: 1 DIF: E

REF: 16.2 Planning for Growth NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

8. What is Smith’s sustainable growth rate if the company has a dividend payout ratio of 70%?

m = 178/450 = 0.396

g = [0.396(1 – 0.70)900/300]/[(900/450) – 0.396(1 – 0.70)900/300]

g = 0.21686 or roughly 0.2169

PTS: 1 DIF: M

REF: 16.2 Planning for Growth NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

9. If Smith pays out 70% of net income as dividends and sales are expected to grow by 20%, what are the external funds required?

DS = 450(0.20) = 90

EFR = (900/450)90 – (145/450)90 – (0.396)450(1 + 0.20)(1 – 0.70)

EFR = 86.848 or roughly 86.85

PTS: 1 DIF: M

REF: 16.2 Planning for Growth NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

10. If sales are expected to grow at 20%, what are Smith’s retained earnings next year? Assume a constant profit margin and a dividend payout ratio of 45%.

m =178/450 = 0.396

Retained earnings = 450(0.396)(1 + 0.20)(1 – 0.45) = 117.61

PTS: 1 DIF: M

REF: 16.2 Planning for Growth NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

Use the following information to answer questions 11 to 14.

Bavarian Brew’s schedule of projected cash disbursement:

All of Bavarian Brew’s sales are credit sales. The company collects 65% of its sales in the next month and the remainder in the month after that.

11. What are Bavarian Brew’s cash collections in March?

(0.35)510 + 0.65(870) = 835

PTS: 1 DIF: E

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

12. What is the value of Bavarian Brew’s receivables account at the end of February?

0.35(510) + 870 = 1048.50

PTS: 1 DIF: E

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

13. What are Bavarian Brew’s cash collections in April?

450(0.65) + 870(0.35) = 597

PTS: 1 DIF: E

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

14. What is the value of Bavarian Brew’s receivables at the end of April?

600 + 157.5 = 757.5

PTS: 1 DIF: E

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

15. Due to a change in economic conditions, Bavarian Brew will only be able to collect 40% of its March sales in April. What is the effect on the company’s cash receipts in April as a result of this change?

Before = 450(0.65) + 870(0.35) = 597

Now = 450(0.35) + 870(0.35) = 462

Change = 462 – 597 = –135

PTS: 1 DIF: E

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

Use the following information to answer questions 16 to 21.

Bavarian Brew’s schedule of projected cash disbursement:

Bavarian Brew’s purchases are 75% of its sales. Of those purchases 15% are paid in cash, 50% are paid in the following month and the remainder in the month after that. Wages and salaries equal 15% of sales each month plus $50. Taxes of $125 are due in April. Bavarian Brew is going to purchase new machinery worth $1000 in March and pay 50% right away and the rest in April. In addition, the company will pay a $175 dividend in February.

16. What are the cash disbursements for February? Assume Bavarian Brew had sales of $500 in December.

0.75(870)(0.15) + 510(0.75)(0.5) + 500(0.75)(0.35) + 50 + 870(0.15) + 175 = 775.875 or roughly 775.88

PTS: 1 DIF: M

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

17. What is the value of the Bavarian Brew’s accounts payable at the end of February? Assume the company had sales of $490 in December.

510(0.75)(0.35) + 870(0.75)(0.85) = 688.50

PTS: 1 DIF: M

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

18. What are Bavarian Brew’s cash disbursements in April?

600(0.75)(0.15) + 450(0.75)(0.5) + 870(0.75)(0.35) + 50 + 600(0.15) + 125 + 1000(0.5) = 1229.63

PTS: 1 DIF: M

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

19. What is the value of Bavarian Brew’s accounts payable at the end of April?

600(0.75)(0.85) + 450(0.75)(0.35) = 500.63

PTS: 1 DIF: M

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

20. What is the value of Bavarian Brew’s accounts payable at the end of March?

450(0.75)(0.85) + 870(0.75)(0.35) + 1000(0.5) = 1015.25

PTS: 1 DIF: M

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

21. What are Bavarian Brew’s cash disbursements in March?

450(0.75)(0.15) + 870(0.75)(0.50) + 510(0.75)(0.35) + 1000(0.5) + 450(0.15) + 50 = 1128.25

PTS: 1 DIF: M

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

Use the following information to answer questions 22 to 25.

Bavarian Brew’s schedule of projected cash disbursement:

All of Bavarian Brew’s sales are credit sales. The company collects 60% of its sales in the next month and the remainder in the month after that.

The company’s purchases are 75% of its sales. Of those purchases 15% are paid in cash, 50% are paid in the following month and the remainder in the month after that. Wages and salaries equal 15% of sales each month plus $50. Taxes of $125 are due in April. Bavarian Brew is going to purchase new machinery worth $1000 in March and pay 50% right away and the rest in April. In addition, the company will pay a $175 dividend in February.

22. If Bavarian Brew starts the year with a cash balance of $500, what is the cash balance at the end of January? Assume that December sales were $450 and November sales were $550.

Cash in = (0.4)550 + (0.6)450 = 490

Cash out = (0.35)(0.75)(550) + (0.5)(0.75)(450) + (0.15)(0.75)(510) + 50 + (0.15)(510) = 497

Cash balance = 500 + 490 – 497 = 493

PTS: 1 DIF: M

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

23. What is Bavarian Brew’s expected net cash flow in March?

Cash in = (0.6)870 + .4(510) = 726

Cash out = (0.35)(0.75)(510) + (0.5)(0.75)870 + (0.15)(0.75)450 + 50 + 450(0.15) + 1000(0.5) 

Cash out = 1128.25

Net = 726 – 1128.25 = –402.25

PTS: 1 DIF: M

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

24. If the cash balance at the beginning of March is $250, what is Bavarian Brew’s cash balance at the end of the month?

Cash in = 726

Cash out = 1128.25

Cash balance = 250 + 726 – 1128.25 = –152.25

PTS: 1 DIF: M

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

25. Due to a change in economic conditions, Bavarian Brew will only be able to collect 40% of its March sales in April. What is company’s cash net cash flow in April as a result of this change?

Cash in = 0.4(870) + 0.4(450) = 528

Cash out: = (0.35)(0.75)(870) + (0.5)(0.75)(450) + (0.15)(0.75)(600) + 50 + (0.15)(600) + 125 + (0.5)(1000) 

= 1229.63

Net cash flow = 528 – 1229.63 = –701.63

PTS: 1 DIF: M

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

26. Which of the following questions is least likely to be asked in long-term financial planning?

REF: 16.1 Overview of the Planning Process NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

27. Under which circumstances (considered independently), can a company grow more rapidly?

REF: 16.2 Planning for Growth NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

28. The rate at which a company can grow without issuing any new shares while keeping its dividend policy, financial policy and profitability constant is the:

REF: 16.2 Planning for Growth NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

29. Suppose a company forecasts sales growth larger than its sustainable growth rate, but it plans to add fewer assets than the current asset-to-sales ratio implies. If other aspects of the company’s performance remain constant, the pro forma external funds required

REF: 16.2 Planning for Growth NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

30. Suppose a company experiences a seasonal pattern in its sales, in addition to a long-term upward trend. Which of the following financing plans has the potential to be least costly to the company?

REF: 16.3 Planning and Control NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

31. Suppose a company experiences a seasonal pattern in its sales, in addition to a long-term upward trend. Which of the following financing plans has the potential to be least risky to the company?

REF: 16.3 Planning and Control NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

32. DigIt! Corporation has a 10% profit margin, its total asset turnover is 1.75, its assets-to-equity ratio is 1.5 and it pays out 35% of its earnings in dividends. What is its sustainable growth rate?

REF: 16.2 Planning for Growth NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

33. DigIt! Corporation has a 10% profit margin, its total asset turnover is 1.75, its assets-to-equity ratio is 1.5 and its sustainable growth rate is 20.6%. What dividend payout ratio is consistent with these values?

REF: 16.2 Planning for Growth NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

34. Big Deal, Inc. wants to grow 30% next year. If it maintains its 40% dividend payout ratio, debt-to-equity ratio of 1 and total asset turnover of 2, what must its profit margin be to achieve this growth?

REF: 16.2 Planning for Growth NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

35. If a company has a debt-to-equity ratio of 0.5, then its assets-to-equity ratio is:

REF: 16.2 Planning for Growth NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

36. MoMoney Co. wants to increase its sustainable growth rate to 10%. If it maintains its 15% profit margin, 25% retention ratio and 0.25 debt-to-equity ratio, what must its total asset turnover value be?

REF: 16.2 Planning for Growth NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

Use the following information to answer questions 37 to 42.

37. If Kooshy Company forecasts a 20% sales increase, what will its pro forma cost of goods sold be? Assume that the percentage of sales remains constant.

REF: 16.2 Planning for Growth NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

38. Suppose Kooshy wishes to maintain a minimum $10 million cash balance, accounts receivable are forecast to be 15% of sales and inventory is expected to be 12% of forecast sales. Also, the company plans to add $35 million to fixed assets (depreciate the additional assets over seven years). What is the pro forma level of total assets if sales are forecasted to increase by 20%?

REF: 16.2 Planning for Growth NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

39. Refer to Kooshy. Suppose pro forma net income is $50 and pro forma total assets are $525. If accounts payable maintain the same percentage of sales, no new long-term debt is issued and the only addition to owners’ equity is to retained earnings, what will be the pro forma balance in notes payable for a forecasted 20% increase in sales? (Use notes payable as the balancing account.)

REF: 16.2 Planning for Growth NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

40. Kooshy Company wishes to maintain its dividend policy in the upcoming year. What will be the pro forma addition to retained earnings if sales are forecasted to increase by 20% and all costs are proportional to sales?

REF: 16.2 Planning for Growth NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

41. Based on ratios derived from the income statement and balance sheet above, what is Kooshy Company’s sustainable growth rate?

REF: 16.2 Planning for Growth NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

42. Based on ratios derived from the income statement and balance sheet above, what is Kooshy Company’s shorthand estimate of external funds required for a 20% increase in sales?

REF: 16.2 Planning for Growth NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

Use the following information to answer questions 43 to 48.

Silly Sally, Inc. forecasts the following sales levels: January, $420; February, $435; March, $450; and April, $470. Historically, 40% of its sales are for cash. Of the remaining sales, 80% are collected in one month, 15% are collected in the second month, while the rest remain uncollected. November sales were $380 and December sales were $500.

Purchases are made at 60% of the next month’s sales forecast and are paid for in the month of purchase. Other cash outlays include the following: rent, $10 monthly; wages and salaries, $50 monthly; a tax payment of $30 in March; an interest payment of $15 in March; and a planned purchase of $20 of new fixed assets in January.

43. Refer to Silly Sally, Inc. What is the forecasted amount to be collected from cash sales in March?

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

44. Refer to Silly Sally, Inc. What is the forecasted total cash collection for January?

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

45. Suppose Silly Sally, Inc. forecasts an ending cash balance in January of $20, its minimum desired balance. If February’s forecasted cash expenditures are $400, which of the following describes the changes to Silly Sally’s cash balance and level of borrowing related to its minimum cash balance at the end of February?

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

46. What is Silly Sally’s forecasted cash outflow for February?

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

47. What is Silly Sally’s change in cash for March?

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

48. Suppose Silly Sally experiences a change in customer payment patterns in accounts receivable, so that payments are now 30% in cash, 60% of credit sales are collected in one month and 35% of credit sales are collected in the second month, with the rest uncollected. What is the new forecasted collection for January, and how much does this differ from the original forecast?

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

49. Smart Products has total assets of $1000, sales of $1540, a net profit margin of 12%, a dividend payout ratio of 40% and accounts payable of $308. If sales are forecasted to increase 30%, what is the short-cut estimate of external funds required?

REF: 16.2 Planning for Growth NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

50. Smart Products has total assets of $1000, sales of $1540, a net profit margin of 12%, a dividend payout ratio of 40% and $555 in equity. What is Smart Products’ sustainable growth rate?

REF: 16.2 Planning for Growth NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

51. Which of these is not an aspect of financial planning?

REF: 16.1 Overview of the Planning Process NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

52. With regard to planning, the first priority for a company that competes by achieving lowest cost production might be:

REF: 16.1 Overview of the Planning Process NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

53. A multiyear action plan for the major investments and competitive initiative that a company’s managers believe will drive the future success of the enterprise is called:

REF: 16.1 Overview of the Planning Process NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

54. The responsibility to assess the feasibility of a strategic plan, given a company’s existing and prospective sources of funding, falls primarily to the:

REF: 16.1 Overview of the Planning Process NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

55. For the prior year, Billy Bob’s Dress Shop had a net profit margin of 5% based upon a sales level of $100 000. Its total assets are $1 000 000 while its total equity is $300 000. If Billy Bob pays out 50% of its net income in dividends, then what is the company’s sustainable growth rate going forward?

g* = [m(1 – d)(A/E)]/{(A/S) – {m(1 – d)(A/E)]}

A/S = 10

A/E = 3.3333

m = 0.05

(1 – d) = 0.5

g* = 0.0084 or 0.84%

PTS: 1 DIF: M

REF: 16.2 Planning for Growth NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

56. In the year just ended, Ellie May’s Power Tools had net income of $200 000 based upon a sales level of $1 500 000. Its total assets are $800 000 while its total equity is $700 000. If Ellie May pays out 0% of its net income in dividends, then what is the company’s sustainable growth rate going forward?

g* = [m(1 – d)(A/E)]/{(A/S) – {m(1 – d)(A/E)]}

A/S = 8/15

A/E = 8/7

m = 200 000/1 500 000

(1 – d) = 1

g* = 0.4 = 40%

PTS: 1 DIF: M

REF: 16.2 Planning for Growth NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

57. You are a financial consultant to a company that asks you what effect a change in leverage has on the company’s sustainable growth. Assuming all other things remain constant and if the percentage of assets that are financed with debt increases, then how will that affect the company’s sustainable growth rate?

REF: 16.2 Planning for Growth NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

58. A top-down approach to sales forecasting begins with:

REF: 16.2 Planning for Growth NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

59. A bottom-up approach to sales forecasting begins with:

REF: 16.2 Planning for Growth NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

60. The percentage-of-sales method for forecasting pro forma financial statements assumes that all income statement and balance sheet items:

REF: 16.2 Planning for Growth NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

61. The Retail Company currently has assets of $3 000 000 and accounts payable of $200 000. The company’s sales last year were $10 000 000 with a net profit margin of 1%. If the company anticipates next year’s sales to grow by 8% over that of last year and the company pays out 25% of its net income in dividends, then what is the estimated external funds requirement for Retail?

EFR = (A/S)ΔS – (AP/S)ΔS – mS(1 + g)(1 – d)

ΔS = 0.08 × 10 000 000 = 800 000

EFR = 800 000(3/10) – 800 000(0.2/10) – 0.01 (10 000 000)(1.08)(1 – 0.25) = 143 000

PTS: 1 DIF: H

REF: 16.2 Planning for Growth NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

62. A company currently has $2 000 000 in assets and $1 000 000 in accounts payable. The company expects sales to increase by 10% from last year to next year. If the company pays all of its net income to shareholders, then what are the estimated external funds required?

EFR = (A/S)ΔS – (AP/S)ΔS – mS(1 + g)(1 – d)

If d = 1:

EFR = (A/S)ΔS – (AP/S)ΔS = A(ΔS/S) – AP(ΔS /S) = Ag – APg = g(A – AP)

EFR = 0.1 (2 000 000 – 1 000 000) = 100 000

PTS: 1 DIF: H

REF: 16.2 Planning for Growth NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

63. Milton Gaming Company currently has assets of $3 000 000 and accounts payable of $200 000. The company’s sales last year were $10 000 000. If the company anticipates next year’s sales to grow by 8% over that of last year and the company pays out 25% of its net income in dividends, then what net profit margin is required in order to have the estimated external funds required be equal to zero?

EFR = (A/S)ΔS – (AP/S)ΔS – mS(1 + g)(1 – d)

ΔS = 0.08 × 10 000 000 = 800 000

800 000(3/10) – 800 000(0.2/10) – m(10 000 000)(1.08)(1 – 0.25) = 0

224 000 = m(10 000 000)(1.08)(0.75)

m = 0.02765

PTS: 1 DIF: H

REF: 16.2 Planning for Growth NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

64. If a company prefers to finance its required assets with a larger portion of short-term debt, then that company is using a(n):

REF: 16.3 Planning and Control NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

65. If a company prefers to finance its required assets with a small portion of short-term borrowings, then that company is using a(n):

REF: 16.3 Planning and Control NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

66. A company that tends to finance permanent assets with long-term debt and seasonal assets with short-term borrowing is following a(n):

REF: 16.3 Planning and Control NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

67. The Little Toy Company will start doing business in February and needs to forecast its total cash receipts for April. Its projected total sales are $15 000, $20 000 and $25 000 for February, March and April, respectively. Little Toy anticipates that 50% of sales will be for cash and that 50% of credit sales will be collected the month after sale with the remainder being collected two months after the sale. What the forecasted cash receipts to Little Toy in April?

April cash sales = 25 000 × 0.5 = 12 500

April collections for March sales = 20 000 × 0.5 × 0.5 = 5000

April collections for Feb sales = 15 000 × 0.5 × 0.5 = 3750

April total collections = 12 500 + 5000 + 3750 = 21 250

PTS: 1 DIF: H

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

68. Marsha Start is looking to restart a home economics-related business. She forecasts that sales for June, July and August will be $100 000, $150 000 and $100 000, respectively. Start expects for cash sales to make up 25% of the sales in each month with 90% of the credit sales collected in the month after the sale with the remainder two months after the sale. What are Start’s estimated total cash collections for August?

August cash sales = 100 000 × 0.25 = 25 000

August collections for July = 150 000 × 0.75 × 0.9 = 101 250

August collections for June = 100 000 × 0.75 × 0.1 = 7 500

Total cash collections for August = 25 000 + 101 250 + 7 500 = 133 750

PTS: 1 DIF: H

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

69. Marsha Start is looking to restart a home economics-related business. She forecasts that sales for June, July and August will be $100 000, $150 000 and $80 000, respectively. Start expects for cash sales to make up 25% of the sales in each month with 90% of the credit sales collected in the month after the sale and the remainder two months after the sale. What are Start’s estimated total cash collections in August for June sales?

June credit sales = 0.75 × 100 000 = 75 000

August collections in June = 75 000 × 0.1 = 7500

PTS: 1 DIF: M

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

Exhibit 16-1

You are working to forecast the cash disbursements for a manufacturing company. Sales are forecasted to be $175 000, $200 000, $225 000 and $250 000 for January, February, March, and April, respectively. The company purchases 25% of each amount in cash and will then pay 70% of the credit purchase in the month following the purchase with the remainder paid in full two months after the purchase.

70. Refer to Exhibit 16-1. What is the amount of February sales to be collected in March for the company?

Feb sales = 200 000

Credit sales in Feb = 200 000 × 0.75 = 150 000

Feb sales collections in March = 150 000 × 0.7 = 105 000

PTS: 1 DIF: H

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

71. Refer to Exhibit 16-1. What is the amount of February sales to be collected in April for the company?

Feb sales = 200 000

Credit sales in Feb = 200 000 × 0.75 = 150 000

Feb sales collections in March = 150 000 × 0.3 = 45 000

PTS: 1 DIF: H

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

72. Which of the following is not a popular growth target?

REF: 16.2 Planning for Growth NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

73. Economic value added (EVA) is the difference between:

REF: 16.2 Planning for Growth NAT: Reflective thinking

LOC: understand shares and bonds

74. Which of the following statements is false?

REF: 16.2 Planning for Growth NAT: Reflective thinking

LOC: understand shares and bonds

75. Which of the following statements is false?

REF: 16.2 Planning for Growth NAT: Reflective thinking

LOC: understand shares and bonds

76. If a company’s ending cash balance exceeds its desired minimum cash balance, the company has a(n):

REF: 16.3 Planning and Control NAT: Reflective thinking

LOC: understand shares and bonds

77. Consider the cash receipts projections of Emma, Inc., which is developing a cash budget for October, November and December. Sales in August and September were $200 000 and $500 000, respectively. The forecast sales are $800 000, $900 000 and $200 000 for October, November and December, respectively. Emma’s sales are 15% cash sales and 85% credit sales; it collects about 60% of each month’s sales in the next month but waits until the following month for the remaining 25% of sales. Bad debts are negligible. The company is expecting a cash dividend of $25 000 in December from a subsidiary. What are the accounts receivable collected (in $000) in October?

PTS: 1 DIF: M

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

78. Consider the cash receipts projections of Emma, Inc., which is developing a cash budget for October, November and December. Sales in August and September were $200 000 and $500 000, respectively. The forecast sales are $800 000, $900 000 and $200 000 for October, November and December, respectively. Emma’s sales are 15% cash sales and 85% credit sales; it collects about 60% of each month’s sales in the next month but waits until the following month for the remaining 25% of sales. Bad debts are negligible. The company is expecting a cash dividend of $25 000 in December from a subsidiary. What are the accounts receivable collected (in $000) in November?

PTS: 1 DIF: M

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

79. Consider the cash receipts projections of Emma, Inc., which is developing a cash budget for October, November and December. Sales in August and September were $200 000 and $500 000, respectively. The forecast sales are $800 000, $900 000 and $200 000 for October, November and December, respectively. Emma’s sales are 15% cash sales and 85% credit sales; it collects about 60% of each month’s sales in the next month but waits until the following month for the remaining 25% of sales. Bad debts are negligible. The company is expecting a cash dividend of $25 000 in December from a subsidiary. What are the total cash receipts (in $000) in October?

PTS: 1 DIF: M

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

80. Consider the cash receipts projections of Emma, Inc., which is developing a cash budget for October, November and December. Sales in August and September were $200 000 and $500 000, respectively. The forecast sales are $800 000, $900 000 and $200 000 for October, November and December, respectively. Emma’s sales are 15% cash sales and 85% credit sales; it collects about 60% of each month’s sales in the next month but waits until the following month for the remaining 25% of sales. Bad debts are negligible. The company is expecting a cash dividend of $25 000 in December from a subsidiary. What are the total cash receipts (in $000) in November?

PTS: 1 DIF: M

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

81. Consider the cash receipts projections of Emma, Inc., which is developing a cash budget for October, November and December. Sales in August and September were $200 000 and $500 000, respectively. The forecast sales are $800 000, $900 000 and $200 000 for October, November and December, respectively. Emma’s sales are 15% cash sales and 85% credit sales; it collects about 60% of each month’s sales in the next month but waits until the following month for the remaining 25% of sales. Bad debts are negligible. The company is expecting a cash dividend of $25 000 in December from a subsidiary. What are the total cash receipts (in $000) in November?

PTS: 1 DIF: M

REF: 16.3 Planning and Control NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

SHORT ANSWER

1. Why is it important for companies to have a strategic financial plan?

PTS: 1 DIF: E

REF: 16.1 Overview of the Planning Process

2. What is a sustainable growth model?

PTS: 1 DIF: E

REF: 16.2 Planning for Growth

3. Why do companies create a cash budget?

PTS: 1 DIF: E

REF: 16.3 Planning and Control

4. What are pro forma financial statements?

PTS: 1 DIF: E

REF: 16.2 Planning for Growth

5. Distinguish between an aggressive strategy and matching strategy.

PTS: 1 DIF: E

REF: 16.3 Planning and Control

6. What is meant by cash disbursement?

PTS: 1 DIF: E

REF: 16.3 Planning and Control