QUIZ 3 Financial Forecasting and Budgeting
QUIZ 3 Financial Forecasting and Budgeting
QUIZ 3 Financial Forecasting and Budgeting
Which of the following assumptions is embodied in the AFN equation?
a) Accounts payable and accruals are tied directly to sales, meaning follow the increases or
decreases in sales.
b) None of the firm's ratios will change.
c) Fixed assets, but not current assets, are tied directly to sales.
d) Common stock and long-term debt are tied directly to sales.
When an organization involves its many employees in the budgeting process in a meaningful
way, the organization is said to be using:
a) zero-based budgeting.
b) employee-based budgeting.
c) activity-based budgeting.
d) participative budgeting.
Which of the following choices correctly denotes managerial functions that are commonly
associated with budgeting? (1) Planning, (2) Performance Evaluation, (3) Coordination of
Activities.
a) Yes, No, Yes
b) Yes, Yes, Yes
c) Yes, No, No
d) Yes, Yes, No
In preparation of budget, which committee of the board of directors compiles, reviews and
approves component budgets of the master budget?
a) Audit Committee
b) Corporate Governance Committee
c) Budget Committee
d) Finance Review Committee
The master budget contains the following components, among others: (1) production
budget, (2) budgeted balance sheet, (3) sales budget, and (4) cash budget. Which of these
components would be prepared first and which would be prepared last?
a) First, 1 and Last, 2
b) First, 1 and Last, 4
c) First, 3 and Last, 2
d) First, 3 and Last, 4
The comprehensive set of budgets that serves as a company's overall financial plan is
commonly known as:
a) a proforma budget.
b) an integrated budget.
c) a financial budget.
d) a master budget.
Generally speaking, budgets are not used to:
a) evaluate performance.
b) assist in the control of profit and operations.
c) identify a company's most profitable products.
d) create a plan of action.
A manufacturing firm would begin preparation of its master budget by constructing a:
a) sales budget.
b) production budget.
c) direct materials budget.
d) direct labor budget
A formal budget program will almost always result in:
a) a detailed plan against which actual results can be compared.
b) higher sales.
c) decreased expenses.
d) improved profits.
A company's sales forecast would likely consider all of the following factors except:
a) general economic and industry trends.
b) political and legal events.
c) top management's attitude.
d) advertising and pricing policies.
All else equal, which of the following is likely to increase a company’s additional funds
needed (AFN)?
a) Accounts payable increase faster than sales.
b) An increase in its dividend payout ratio.
c) The company has a lot of excess capacity.
d) All of the statements are correct.
Which of the following is not determinant of growth rate?
a) Total Assets Turnover
b) Profit Margin
c) Credit Policy
d) Dividend Policy
Which of the following is not an element of financial planning model
a) Financial requirements
b) Assets requirements
c) Economic Environment assumption
d) Historical financial statements
A company that has rapidly growing sales will probably
a) have a unbalance increase in assets and, increase in liabilities and retained earnings.
b) find that all of the above are true.
c) need additional long-term financing.
d) have increasing asset requirements.
PROBLEM 1: Clayton Industries is planning its operations for next year, and Ronnie Clayton,
the CEO, wants you to forecast the firm's additional funds needed (AFN). The firm is
operating at full capacity. Data for use in your forecast are as follow: (Pesos are in millions)
Last year’s sales, P350; Sales growth rate, 30%; Last year’s total assets, P500; Last year’s
profit margin, 5%; Last year’s accounts payable, P40; Last year’s notes payable, P50; Last
year’s accruals, P30; Target payout ratio, 60%.
Increase in Assets
Last year’s total assets ₱ 500.00 million
Sales growth rate 30.00%
Increase in Assets ₱ 150.00 million
Increase in Liabilities
Spontaneous liabilities
Last year’s accounts payable ₱ 40.00 million
Last year’s accruals ₱ 30.00 million
Total Spontaneous Liab ₱ 70.00 million
Sales growth rate 30.00%
Increase in Liabilities ₱ 21.00 million
PROBLEM 2: Consider the income statement for Heir Jordan Corporation: Sales, 26,000;
Costs, 10,400; Taxable income, 15,600; Taxes (35%), 5,460; Net Income, 10,140; Dividends,
3,448; Additions to retained earnings, 6,692. A 22 percent growth rate in sales is projected.
What is the pro forma addition to retained earnings assuming all costs vary proportionately
with sales?
Retention ratio
Net income ₱ 10,140.00
Dividends ₱ 3,448.00 34.00%
Addition to retained earnings ₱ 6,692.00 66.00%
PROBLEM 3: The most recent financial statements for Last in Line, Inc. are shown here:
Sales, 18,500; Costs, 14,800; Taxable income, 3,700; Taxes (33%), 1,221; Net Income, 2,479;
Assets, 89,510; Debt, 19,580; Equity, 89,510.Assets and costs are proportional to sales. Debt
and equity are not. A dividend of P992 was paid, and the company wishes to maintain a
constant payout ratio. Next year's sales are projected to be P21,830. What is the amount of
the external financing need?
Increase in Assets
Last year’s total assets ₱ 89,510.00
Sales growth rate 18.00% (21,830 / 18,500 = 1.18 - 1 = 18%)
Increase in Assets ₱ 16,111.80
PROBLEM 4: The most recent financial statements for Watchtower, Inc. are shown here
(assuming no income taxes): Sales, P4,100; Costs, P2,624; Net income, P1,476; Assets,
P9,110; Debt, P5,833; Equity, P3,277 Assets and costs are proportional to sales. Debt and
equity are not. No dividends are paid. Next year's sales are projected to be P5,002. What is
the amount of the external financing need?
Increase in Assets
Last year’s total assets ₱ 9,110.00
Sales growth rate 22.00% (5,002/4,100 = 1.22 - 1 = 22%)
Increase in Assets ₱ 2,004.20
PROBLEM 5: Based on the AFN equation, what is the AFN for the coming year?
Chua Chang & Wu Inc. is planning its operations for next year, and the CEO wants you to
forecast the firm's additional funds needed (AFN). The firm is operating at full capacity. Data
for use in your forecast are as follow: Last year’s sales, P200,000; Sales growth rate, 40%;
Last year’s total assets, P135,000; Last year’s profit margin, 20.0%; Last year's accounts
payable, P50,000; Last year's notes payable, P15,000; Last year's accruals, P20,000; Target
payout ratio, 25.0%.
Increase in Assets
Last year’s total assets ₱ 135,000.00
Sales growth rate 40.00%
Increase in Assets ₱ 54,000.00
Increase in Liabilities
Spontaneous liabilities
Last year’s accounts payable ₱ 50,000.00
Last year’s accruals ₱ 20,000.00
Total Spontaneous Liab ₱ 70,000.00
Sales growth rate 40.00%
Increase in Liabilities ₱ 28,000.00
Increase in Retained Earnings
Last year’s sales ₱ 200,000.00
Last year’s profit margin 20.00%
Last year's profit ₱ 40,000.00
Sales growth rate + 100% 140.00%
Current year profit ₱ 56,000.00
Retention ratio 75.00%
Increase in Retained Earnings ₱ 42,000.00
PROBLEM 5: Agustin has projected sales of P500,000, a gross profit margin of 20%, a return
on sales of 8%. Accounts receivable has been 42% of sales while inventory has been 20% of
cost of sales. Agustin has minimum cash balance of P25,000 and fixed assets are projected to
be P90,000. What would be the total assets requirements?
Accounts Receivable
Sales ₱ 500,000.00
AR Rate 42.00%
Accounts Receivable ₱ 210,000.00
Inventory
Sales ₱ 500,000.00
COS rate 80.00% (100% - GP rate 20% = 80%)
Cost of sales ₱ 400,000.00
Inventory rate 20.00%
Inventory ₱ 80,000.00
PROBLEM 6: Vanilla has projected sales of P800,000, a cost of goods sold to sales ratio
amounted to 32%, a return on sales of 15%. Accounts receivable has been 20% of sales while
inventory has been 10% of cost of sales and prepaid expenses is 20% of the operating
expenses. Vanilla has minimum cash balance of P35,000 and fixed assets are projected to be
P80,000. What would be the total assets requirements?
Inventory
Sales ₱ 800,000.00
COS rate 32.00%
Cost of sales ₱ 256,000.00
Invetory rate 10.00%
Inventory ₱ 25,600.00
Prepaid expense
Sales ₱ 800,000.00 Sales 100%
Opex rate 53.00% COS 32%
Opex ₱ 424,000.00 GP 68%
Prepaid expense rate 20.00% OPEX 53%
Prepaid expense ₱ 84,800.00 Profit 15%
PROBLEM 6: The beginning balance of total assets amounted to P1,000, while ending
balance amounted to P1,175. Spontaneous current liabilities and non-spontaneous current
liabilities at the beginning of the year amounted to P200 and P250, respectively. Fixed assets
amounted to P300. Net income amounted to P180 and external financing needed is P25.
What is the plowback ratio? (answer must have no decimal with percentage sign, rounded
off, e.g. 70%)