Exam 14: Short-Term Financial Planning

The cash budget is composed of four elements: cash receipts,cash disbursements,depreciation,and the net change in cash for the period.

Mercer,Inc.had the following sales for the past six months.Mercer collects its credit sales 30% in the month of sale,60% one month after the sale,and 10% two months after the sale. What are Mercer's total cash receipts for the month of March?

Potential sources of financing to support an increase in sales include all of the following except:

The percent of sales method provides a more detailed plan for future financing needs than the cash budget because both pro forma income statements and balance sheets are used in the analysis.

The first step in a corporation's financial forecasting process is the determination of the firm's financing needs.

A company calculates its discretionary financing needed and determines this amount of capital cannot be raised at a reasonable cost.Which of the following would reduce the amount of discretionary financing needed?

Accounts payable and accrued expenses are known as discretionary sources of financing.

Traditional financial forecasting takes the sales forecast as given and forecasts the corresponding expenses,assets,and liabilities of the firm.

Pro forma statements are important since they formally report the performance of the firm during the previous reporting period.

The cash budget can be used to provide an estimate of the firm's future financing needs.

The primary purpose of a cash budget is to

Use the "percent of sales method" of preparing pro forma financial statements to determine the projection for next year's accounts payable.Make the following assumptions: current year's sales are $27,800,000; current year's cost of goods sold is $17,528,000; sales are expected to rise by 30%.The firm's investment in accounts payable in the current year is $2,218,500.What is the projection for next year's accounts payable?

The percent of sales method does not provide a reasonable prediction of asset levels for instances when there are economies of scale in the use of the asset being forecast and when asset purchases are lumpy.

It is often the case that the planning process has its greatest value when the resulting forecasts have the most error,because the planning process offers its greatest value when the future is the most uncertain.

When economies of scale exist,the percent of sales method will overestimate the assets required and therefore overestimate the amount of discretionary financing needed.

Buster Enterprises' projected sales for the first six months of 2010 are given below: 40% of sales are collected in cash at time of sale,50% are collected in the month following the sale,and the remaining 10% are collected in the second month following the sale.Cost of goods sold is 60% of sales.Purchases are made in the month prior to the sales,and payments for purchases are made in the month of the sale.Total other cash expenses are $40,000/month.The company's cash balance as of February 28,2010 will be $25,000.Excess cash will be used to retire short-term borrowing (if any).Buster Enterprises has no short term borrowing as of February 28,2010.Assume that the interest rate on short-term borrowing is 1% per month.The company must have a minimum cash balance of $15,000 at the beginning of each month.What is Buster Enterprises' total cash disbursements for April 2010?

When preparing pro forma financial statement,the income statement must be prepared first because the projected retained earnings balance on the balance sheet is based on the expected net income.

If the sales growth rate is greater than zero,then the discretionary financing needed will also be greater than zero.

All of the following are useful purposes of pro forma financial statements except:

Using the percent of sales method,projected common stock on the 2010 pro forma balance sheet is equal to (Common Stock 2009/Sales 2009)times Projected Sales 2010.