Deck 11: Forecasting Financial Requirements

Question 1

Annual projections are adequate after year 2.

Answer 1

True

Question 2

Pro forma financial statements serve two purposes: forecast how profitable you can expect a firm to be and how much financing will be needed to finance a firm's assets.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

Cash flow can be projected in two ways: using the income statement to project cash flows or preparing a cash budget.

Question 5

Spontaneous debt financing results when accounts payable increase in proportion to a firm's sales.

Question 6

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

Question 7

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

Question 8

Marcia likes to use other people's money when financing her business. In this way, she "does more with less" by controlling resources without actually owning them.

Question 9

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

Question 10

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.

Question 11

Profits that are retained within the company rather than being distributed to the owners are referred to as retained income.

Question 12

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

Question 13

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

Question 14

Cost of goods sold is always fixed.

Question 15

When graphed, entrepreneurs' sales projections for a new venture often resemble a hockey stick-the sales numbers are flat or rise slightly at first (like the blade of a hockey stick) and then soar upward (like a hockey stick's handle).

Question 16

A line of credit is a short-term loan used in a business to help with financing fixed assets.

Question 17

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.

Question 18

Profits reward an owner for investing in a company and constitute a primary source of financing for future growth if reinvested in the business.

Question 19

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

Question 20

Many small firms have a tendency to underestimate the amount of capital the business requires when beginning operations.

Question 21

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

A) variable expense
B) amount of sales
C) cost of goods sold
D) operating expense

Question 22

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

A) In the amount of sales section
B) In the operating expenses section
C) In the cost of goods sold section
D) In the interest expense section

Question 23

Investors would like to know if Arthur's new business will have adequate cash flows. Arthur can provide this information in

A) pro forma financial statements.
B) historical financial statements.
C) pro bono financial statements.
D) quid pro quo financial statements.

Question 24

Liquid assets include

A) accounts payable.
B) equipment.
C) working capital.
D) office supplies.

Question 25

The greater a firm's sales, the greater the need for financing because of greater _____ requirements.

A) asset
B) employee
C) marketing
D) operational

Question 26

Roland has already projected his company's sales. The next step in forecasting his company's income is to project

A) operating expenses.
B) interest expense.
C) taxes.
D) cost of goods sold.

Question 27

Mario has high hopes for his new business and anticipates a very large profit margin. In preparing his forecasts, he should use industry averages regardless of his hopes.

Question 28

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
B) bootstrap forecasting
C) asset turnover ratio
D) discounted sales

Question 29

Which of the following sources of information would be the most inclusive for an entrepreneur engaging in financial forecasting?

A) Attend trade shows
B) Contact the industry association
C) Access industry information from Dun & Bradstreet
D) Talk to others in the industry

Question 30

Financial projections should be limited to the income statement to prevent information overload on lenders and investors.

Question 31

Verlin wants to avoid a common mistake often made by new entrepreneurs. Which of the following would you advise him to do?

A) Spend as little as possible.
B) Carry no inventory.
C) Be sure to have adequate financing.
D) Do without anything that is not absolutely essential.

Question 32

An entrepreneur should always project at least two scenarios for financial forecasting and budgeting: best case and worst case.

Question 33

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

Question 34

Marcia uses other people's money whenever possible to finance her business. She prefers to minimize and control rather than to maximize and own resources. This practice is known as

A) high-stepping.
B) bootstrapping.
C) unethical business practice.
D) taking advantage of others.

Question 35

Which of the following is the best source of information when forecasting?

A) Industry experts
B) Trade associations
C) Prospective customers
D) Bankers

Question 36

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

A) percentage-of-inventory
B) percentage-of-equity
C) percentage-of-debt
D) percentage-of-sales

Question 37

Serena is preparing her budget for the upcoming year. This would be good time for her to

A) communicate with her suppliers and scrutinize her relationships with them.
B) enforce a cost-containment strategy.
C) up her expectations for the upcoming year.
D) run best-case and worst-case scenarios.

Question 38

Projecting financials may present a challenge because in a startup business,

A) things seldom go as planned.
B) things always go as planned.
C) expenses are too complex.
D) expenses are simple.

Question 39

D&R Products forecasts that it will require $10,000 for equipment and depreciation will be over five years. The $10,000 will be reflected in the balance sheet as

A) inventory.
B) gross fixed assets.
C) net fixed assets.
D) accounts payable.

Question 40

A firm should finance its growth in such a way as to maintain adequate

A) liquidity.
B) inventory.
C) sales.
D) volume.

Question 41

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

A) can over-project for sales if she has done research.
B) should develop realistic sales projections.
C) would be better served by under-projecting sales so she won't be disappointed.
D) should ignore projections until after one year of operations when she can realistically project.

Question 42

Even though Miriam projected an annual positive cash flow, she may run out of cash if

A) customers use debit cards for their purchases.
B) her sales are seasonal.
C) sales exceed her projections.
D) she finds a less expensive supplier.

Question 43

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

A) debt ratio.
B) statement of cash flows.
C) current ratio.
D) asset turnover ratio.

Question 44

No single planning document is more important in the life of a company than the

A) income statement.
B) cash budget.
C) balance sheet.
D) corporate charter.

Question 45

Briefly describe what a cash budget is and its importance to a small business.

Question 46

Tony operates a computer retail business. Based on this industry, how often should sales projections be made for Tony's company?

A) Monthly for year 1 and annually for years 2 and 3
B) Annually for year 1 and quarterly for years 2 and 3
C) Monthly for year 1 and quarterly for years 2 and 3
D) Annually for year 1 and monthly for years 2 and 3

Question 47

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

A) annually.
B) quarterly.
C) monthly.
D) weekly.

Question 48

Jill's business has current assets of $50,000 and current liabilities of $25,000. Which of the following statements is true about her company's current ratio?

A) The ratio is 50 percent and is acceptable for most industries.
B) The ratio is 2.0 and is acceptable for most industries.
C) The ratio is $25,000 and is not acceptable for most industries.
D) The current ratio cannot be determined from the information given.

Question 49

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

A) operating profits.
B) outside investors.
C) spontaneous debt financing.
D) retained earnings.

Question 50

Mark follows the cash budget like it was carved in stone. He has fallen prey to the one real danger in overreliance on a cash budget which is

A) inflexibility.
B) pliability.
C) exaggeration.
D) errors.

Question 51

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.
B) calculate cash flow from operations.
C) determine the end-of-month cash balance.
D) determine the beginning-of-the-month cash balance.

Question 52

As Willard's business grows and prospers, his company's total assets requirements will equal

A) total sources of financing less owner's investment and retained earnings.
B) spontaneous debt financing plus bank loans plus owner's investment less retained earnings.
C) total sources of financing less net assets and owner's investment.
D) spontaneous debt financing plus bank loans plus owner's investment plus retained earnings.

Question 53

A simple listing of expected cash inflows and outflows provides the entrepreneur with a(n)

A) income statement.
B) cash budget.
C) pro forma balance sheet.
D) net equity computation.

Question 54

D&R Products forecast a first-year asset requirement of $143,500; therefore, the total debt requirement is

A) $143,500.
B) a set percentage of sales.
C) equal to the current ratio.
D) dependent on the owner's equity amount.

Question 55

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

A) of the seasonality of its sales.
B) one year is too far into the future to predict.
C) the marketing plans may change during the year.
D) production breakdowns may alter the company's situation.

Question 56

Zeno had a great idea but no cash so he asked the bank for a loan to finance the entire operation. It seems he forgot that a bank would never provide _____ percent of the firm's financing.

A) 25
B) 50
C) 75
D) 100

Question 57

Entrepreneurs determine financial requirements based on

A) predictions.
B) suggestions.
C) assumptions.
D) projections.

Question 58

David has a company that decorates houses for the holidays. He has secured a $25,000 line of credit from his bank. David is most likely to use this line of credit for which of the following?

A) A warehouse to store decorations until they are sold
B) Labor to install the decorations in November
C) A truck with a ladder to put up lights
D) A full-time, year-round office person to answer phones and take orders

Question 59

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

A) spontaneous debt financing
B) trade credit financing
C) escalating debt
D) asset-based financing

Question 60

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

A) Best- and worst-case scenarios
B) Aggressive sales increases, conservative assumptions, and worst-case scenarios
C) Moderate sales increases, break-even, and worst-case scenarios
D) Most-likely, probably, and least-likely scenarios

Question 61

Match the term with its definition.
a.cash budget
b.line of credit
c.net working capital
d.percentage-of-sales technique
e.pro forma financial statements
f.spontaneous debt financing
Statements that project a firm's financial performance and condition, including a firm's projected profits, assets and financing requirements, and cash flows

Question 62

Match the term with its definition.
a.cash budget
b.line of credit
c.net working capital
d.percentage-of-sales technique
e.pro forma financial statements
f.spontaneous debt financing
Short-term debts, such as accounts payable, that automatically increase in proportion to a firm's sales

Question 63

Briefly describe working capital and net working capital.

Question 64

Match the term with its definition.
a.cash budget
b.line of credit
c.net working capital
d.percentage-of-sales technique
e.pro forma financial statements
f.spontaneous debt financing
A listing of cash receipts and cash disbursements, usually for a relatively short time period, such as a week or a month

Question 65

Match the term with its definition.
a.cash budget
b.line of credit
c.net working capital
d.percentage-of-sales technique
e.pro forma financial statements
f.spontaneous debt financing
A method of forecasting asset requirements using a ratio of assets to sales

Question 66

Match the term with its definition.
a.cash budget
b.line of credit
c.net working capital
d.percentage-of-sales technique
e.pro forma financial statements
f.spontaneous debt financing
A short-term loan

Question 67

Explain the percentage-of-sales technique.

Question 68

Match the term with its definition.
a.cash budget
b.line of credit
c.net working capital
d.percentage-of-sales technique
e.pro forma financial statements
f.spontaneous debt financing
A measure of a company's liquidity, equal to current assets less current liabilities