Which of the following is NOT a key element in strategic planning as it is described in the text?

The statement of the corporation's scope.

The statement of corporate objectives

Which of the following assumptions is embodied in the AFN equation?

Accounts payable and accruals are tied directly to sales.

All balance sheet accounts are tied directly to sales.

Common stock and long-term debt are tied directly to sales.

Fixed assets, but not current assets, are tied directly to sales.

Last year's total assets were not optimal for last year's sales.

Jefferson City Computers has developed a forecasting model to estimate its AFN for the upcoming year. All else being equal, which of the following factors is most likely to lead to an increase of the additional funds needed (AFN)?

A sharp increase in its forecasted sales.

A sharp reduction in its forecasted sales.

The company reduces its dividend payout ratio

The company switches its materials purchases to a supplier that sells on terms of 1/5, net 90, from a supplier whose terms are 3/15, net 35.

The company discovers that it has excess capacity in its fixed assets.

The term "additional funds needed (AFN)" is generally defined as follows:

Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock, to support operations

Funds that are obtained automatically from routine business transactions.

The amount of assets required per dollar of sales.

The amount of internally generated cash in a given year minus the amount of cash needed to acquire the new assets needed to support growth.

A forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant.

The capital intensity ratio is generally defined as follows:

The amount of assets required per dollar of sales, or A0*/S0.

Sales divided by total assets, i.e., the total assets turnover ratio.

The percentage of liabilities that increase spontaneously as a percentage of sales.

The ratio of sales to current assets.

The ratio of current assets to sales.

Which of the following is NOT one of the steps taken in the financial planning process?

Consult with key competitors about the optimal set of prices to charge, i.e., the prices that will maximize profits for our firm and its competitors.

Assumptions are made about future levels of sales, costs, and interest rates for use in the forecast.

The entire financial plan is reexamined, assumptions are reviewed, and the management team considers how additional changes in operations might improve results.

Projected ratios are calculated and analyzed.

Develop a set of projected financial statements

Spontaneously generated funds are generally defined as follows:

Funds that arise out of normal business operations from its suppliers, employees, and the government, and they include spontaneous increases in accounts payable and accruals.

Assets required per dollar of sales.

A forecasting approach in which the forecasted percentage of sales for each item is held constant

Funds that a firm must raise externally through borrowing or by selling new common or preferred stock.

The amount of cash raised in a given year minus the amount of cash needed to finance the additional capital expenditures and working capital needed to support the firm's growth.

A company expects sales to increase during the coming year, and it is using the AFN equation to forecast the additional capital that it must raise. Which of the following conditions would cause the AFN to increase?

The company increases its dividend payout ratio.

The company previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity.

The company begins to pay employees monthly rather than weekly.

The company's profit margin increases.

The company decides to stop taking discounts on purchased materials.

Which of the following statements is CORRECT?

The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales.

Perhaps the most important step when developing forecasted financial statements is to determine the breakdown of common equity between common stock and retained earnings.

Forecasted financial statements, as discussed in the text, are used primarily as a part of the managerial compensation program, where management's historical performance is evaluated.

The capital intensity ratio gives us an idea of the physical condition of the firm's fixed assets.

The AFN equation produces more accurate forecasts than the forecasted financial statement method, especially if fixed assets are lumpy and economies of scale exist

Which of the following statements is CORRECT?

Operating plans provide management with detailed implementation guidance, consistent with the corporate strategy, to help meet the corporate objectives. These operating plans can be developed for any time horizon, but many companies use a 5-year horizon.

Once a firm has defined its purpose, scope, and objectives, it must develop a strategy or strategies for achieving its goals. The statement of corporate strategies sets forth detailed plans rather than broad approaches for achieving a firm's goals.

A firm's corporate purpose states the general philosophy of the business and provides managers with specific operational objectives.

A firm's mission statement defines its lines of business and geographic area of operations.

The corporate scope is a condensed version of the entire set of strategic plans.

Which of the following statements is CORRECT?

Additional funds needed (AFN) are typically raised using a combination of notes payable, long-term debt, and common stock. Such funds are non-spontaneous in the sense that they require explicit financing decisions to obtain them.

Since accounts payable and accrued liabilities must eventually be paid off, as these accounts increase, AFN as calculated by the AFN equation must also increase.

Suppose a firm is operating its fixed assets at below 100% of capacity, but it has no excess current assets. Based on the AFN equation, its AFN will be larger than if it had been operating with excess capacity in both fixed and current assets.

If a firm retains all of its earnings, then it cannot require any additional funds to support sales growth.

If a firm has a positive free cash flow, then it must have either a zero or a negative AFN.

Which of the following statements is CORRECT?

A negative AFN indicates that retained earnings and spontaneous capital are far more than sufficient to finance the additional assets needed.

Any forecast of financial requirements involves determining how much money the firm will need, and this need is determined by adding together increases in assets and spontaneous liabilities and then subtracting operating income.

The AFN equation for forecasting funds requirements requires only a forecast of the firm's balance sheet. Although a forecasted income statement may help clarify the results, income statement data are not essential because funds needed relate only to the balance sheet.

Dividends are paid with cash taken from the accumulated retained earnings account, hence dividend policy does not affect the AFN forecast.

If assets and spontaneously generated liabilities are not projected to grow at the same rate as sales, then the AFN method will provide more accurate forecasts than the projected financial statement method.

Which of the following statements is CORRECT?

The sustainable growth rate is the maximum achievable growth rate without the firm having to raise external funds. In other words, it is the growth rate at which the firm's AFN equals zero.

If a firm's assets are growing at a positive rate, but its retained earnings are not increasing, then it would be impossible for the firm's AFN to be negative.

If a firm increases its dividend payout ratio in anticipation of higher earnings, but sales and earnings actually decrease, then the firm's actual AFN must, mathematically, exceed the previously calculated AFN.

Higher sales usually require higher asset levels, and this leads to what we call AFN. However, the AFN will be zero if the firm chooses to retain all of its profits, i.e., to have a zero dividend payout ratio.

Dividend policy does not affect the requirement for external funds based on the AFN equation

Which of the following statements is CORRECT?

Firms whose fixed assets are "lumpy" frequently have excess capacity, and this should be accounted for in the financial forecasting process

When we use the AFN equation, we assume that the ratios of assets and liabilities to sales (A0*/S0 and L0*/S0) vary from year to year in a stable, predictable manner.

When fixed assets are added in large, discrete units as a company grows, the assumption of constant ratios is more appropriate than if assets are relatively small and can be added in small increments as sales grow.

For a firm that uses lumpy assets, it is impossible to have small increases in sales without expanding fixed assets.

Regression techniques cannot be used in situations where excess capacity or economies of scale exist.

Bus fin ch.6 Concept

Authored by Thanagid Chaichayanon

Financial Education

University

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29 questions

Show all answers

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

The first, and most critical, step in constructing a set of forecasted financial statements is the sales forecast

True

False

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

A typical sales forecast, though concerned with future events, will usually be based on recent historical trends and
events as well as on forecasts of economic prospects.

True

False

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Errors in the sales forecast can be offset by similar errors in costs and income forecasts. Thus, as long as the errors are
not large, sales forecast accuracy is not critical to the firm.

True

False

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

As a firm's sales grow, its current assets also tend to increase. For instance, as sales increase, the firm's inventories
generally increase, and purchases of inventories result in more accounts payable. Thus, spontaneously generated funds
arise from transactions brought on by sales increases.

True

False

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in
sales, assuming the firm is operating with a positive profit margin.

True

False

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally
large decrease in some other asset.

True

False

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

If a firm wants to maintain its ratios at their existing levels, then if it has a positive sales growth rate of any amount, it
will require some amount of external funding.

True

False

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Bus fin ch.6 Concept

The first, and most critical, step in constructing a set of forecasted financial statements is the sales forecast

A typical sales forecast, though concerned with future events, will usually be based on recent historical trends and
events as well as on forecasts of economic prospects.

Errors in the sales forecast can be offset by similar errors in costs and income forecasts. Thus, as long as the errors are
not large, sales forecast accuracy is not critical to the firm.

As a firm's sales grow, its current assets also tend to increase. For instance, as sales increase, the firm's inventories
generally increase, and purchases of inventories result in more accounts payable. Thus, spontaneously generated funds
arise from transactions brought on by sales increases.

The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in
sales, assuming the firm is operating with a positive profit margin.

A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally
large decrease in some other asset.

If a firm wants to maintain its ratios at their existing levels, then if it has a positive sales growth rate of any amount, it
will require some amount of external funding.

To determine the amount of additional funds needed (AFN), you may subtract the expected increase in liabilities,
which represents a source of funds, from the sum of the expected increases in retained earnings and assets, both of which are uses of funds.

When developing forecasted financial statements there are some inputs that management controls such as the growth
rate and operating costs/sales ratio, while other inputs such as the tax rate and interest rate are not under its control.

If a firm with a positive net worth is operating its fixed assets at full capacity, if its dividend payout ratio is 100%, and
if it wants to hold all financial ratios constant, then for any positive growth rate in sales, it will require external financing.

Access all questions and much more by creating a free account

Similar Resources on Wayground

Popular Resources on Wayground

Discover more resources for Financial Education

Bus fin ch.6 Concept

The first, and most critical, step in constructing a set of forecasted financial statements is the sales forecast

A typical sales forecast, though concerned with future events, will usually be based on recent historical trends andevents as well as on forecasts of economic prospects.

Errors in the sales forecast can be offset by similar errors in costs and income forecasts. Thus, as long as the errors arenot large, sales forecast accuracy is not critical to the firm.

As a firm's sales grow, its current assets also tend to increase. For instance, as sales increase, the firm's inventoriesgenerally increase, and purchases of inventories result in more accounts payable. Thus, spontaneously generated fundsarise from transactions brought on by sales increases.

The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth insales, assuming the firm is operating with a positive profit margin.

A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equallylarge decrease in some other asset.

If a firm wants to maintain its ratios at their existing levels, then if it has a positive sales growth rate of any amount, itwill require some amount of external funding.

To determine the amount of additional funds needed (AFN), you may subtract the expected increase in liabilities,which represents a source of funds, from the sum of the expected increases in retained earnings and assets, both of which are uses of funds.

When developing forecasted financial statements there are some inputs that management controls such as the growthrate and operating costs/sales ratio, while other inputs such as the tax rate and interest rate are not under its control.

If a firm with a positive net worth is operating its fixed assets at full capacity, if its dividend payout ratio is 100%, andif it wants to hold all financial ratios constant, then for any positive growth rate in sales, it will require external financing.

Access all questions and much more by creating a free account

Similar Resources on Wayground

Popular Resources on Wayground

Discover more resources for Financial Education

A typical sales forecast, though concerned with future events, will usually be based on recent historical trends and
events as well as on forecasts of economic prospects.

Errors in the sales forecast can be offset by similar errors in costs and income forecasts. Thus, as long as the errors are
not large, sales forecast accuracy is not critical to the firm.

As a firm's sales grow, its current assets also tend to increase. For instance, as sales increase, the firm's inventories
generally increase, and purchases of inventories result in more accounts payable. Thus, spontaneously generated funds
arise from transactions brought on by sales increases.

The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in
sales, assuming the firm is operating with a positive profit margin.

A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally
large decrease in some other asset.

If a firm wants to maintain its ratios at their existing levels, then if it has a positive sales growth rate of any amount, it
will require some amount of external funding.

To determine the amount of additional funds needed (AFN), you may subtract the expected increase in liabilities,
which represents a source of funds, from the sum of the expected increases in retained earnings and assets, both of which are uses of funds.

When developing forecasted financial statements there are some inputs that management controls such as the growth
rate and operating costs/sales ratio, while other inputs such as the tax rate and interest rate are not under its control.

If a firm with a positive net worth is operating its fixed assets at full capacity, if its dividend payout ratio is 100%, and
if it wants to hold all financial ratios constant, then for any positive growth rate in sales, it will require external financing.