a.

cash receipts decline by $180

1. The short-term financing strategy where a compnay relies b. cash receipts decline by $90
heavily on short term borrowing to finance a portion of their c. cash receipts increase by $270
d. cash receipts increase by $90
long term growth is called a(n)
a. conservative strategy
b. aggressive strategy ANS: B
c. matching strategy before: 450(.6) + 870(.4) = 618
d. growth strategy now : 450(.4) + 870(.4) = 528
change 528-618 = -90
NARRBEGIN: Cash Budget
Bavarian Brew’s schedule of projected cash disbursement NARRBEGIN: Total cash budget
Bavarian Brew’s schedule of projected cash disbursement
Jan Feb Mar Apr
Sales $510 $870 $450 $600 Jan Feb Mar Apr
Sales $510 $870 $450 $600
All of Bavarian Brew’s sales are credit sales. The company
collects 60% of its sales in the next month and the remainder All of Bavarian Brew’s sales are credit sales. The company
in the month after that. collects 60% of its sales in the next month and the remainder
NARREND in the month after that.

4. What are Bavarian Brew’s cash collections in March? The company’s purchases are 75% of its sales. Of those
a. $726 purchases 15% are paid in cash, 50% are paid in the
b. $654 following month and the remainder in the month after that.

m
c. $324

er as
The company’s wages and salaries equal 15% of sales each
d. $522
month plus $50. Taxes of $125 are due in April. The

co
eH w
company is going to purchase new machinery worth $1000
ANS: A
in March and pay 50% right away and the rest in April. In
(.4)510 + .6(870) = 726

o.
addition, the company will pay a $175 dividend in February.
5. rs e
What is the value of Bavarian Brew's receivables account at
NARREND
ou urc
the end of February?
9 .If Bavarian Brew starts the year with a cash balance of $500,
a. $1074
b. $306 what is the cash balance at the end of January? Assume that
December sales were $450 and November sales were $550.
o

c. $204
d. $348 a. $483
aC s

b. $493
vi y re

ANS: A c. $497
.4(510) + 870 = 1074 d. $500

ANS: B
6. What are the Bavarian Brew’s cash collections in April?
in: (.4)550 + (.6)450 = 490
ed d

a. $528
out: (.35)(.75)(550) + (.5)(.75)(450) + (.15)(.75)(510) + 50 +
ar stu

b. $618
c. $702 (.15)(510) = 497
d. $835 cash balance: 500+490-497 =493

ANS: B 10. What is Bavarian Brew’s expected net cash flow in March?
is

450(.6) + 870(.4) = 618 a. -$402.25

Th

b. $402.25
7. What is the value Bavarian Brew's receivables at the end of c. $726
April? d. -$1,128.25
a. $780
ANS: A
sh

b. $180
c. $600 in: (.6)870 + .4(510) = 726
d. $270 out: (.35)(.75)(510) + (.5)(.75)870 + (.15)(.75)450 + 50 +
450(.15) + 1000(.5) = 1128.25
ANS: A net = 726-1128.25 = -402.25
600 + 180 = 780
11. If the cash balance at the beginning of March is $250, what
8. Due to a change in economic conditions Bavarian Brew will only is Bavarian Brew's cash balance at the end of the month?
be able to collect 40% of its March sales in April. What is the a. $250
effect on the company’s cash receipts in April as a result of b. -$152.25
this change? c. $652.25
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 d. -$652.25 a. net cash flows of $21; borrowing will increase $21
b. net cash flows of $21; borrowing will decrease $21
ANS: A c. net cash flows of $11; borrowing will increase $9
in: 726 d. net cash flows of $11; borrowing will decrease $9
out: 1128.25
17. What are Silly Sally’s forecasted cash outflows for February?
cash balance: 250 + 726 - 1128.25 = -152.25
a. $270
b. $330
12. Due to a change in economic conditions Bavarian Brew will c. $395
only be able to collect 40% of its March sales in April. What d. $450
is company’s cash net cash flow in April as a result of this
change? 18. What is Silly Sally’s change in cash for March?
a. $528 a. $40 increase in cash
b. $1229.63 b. $40 decrease in cash
c. -$701.63 c. $85 increase in cash
d. $701.63 d. $20 increase in cash

ANS: C 19. Suppose Silly Sally experiences a change in customer

in .4(870) + .4(450) = 528 payment patterns in accounts receivable, so that payments
out: (.35)(.75)(870) + (.5)(.75)(450) + (.15)(.75)(600) + 50 + are now 30% in cash, and of the credit sales, 60% are
(.15)(600) + 125 + (.5)(1000) = 1229.63 collected in one month, 35% are collected in the second
net 528-1229.63 = -701.63 monthy, with the rest uncollected. What is the new
forecasted collection for January, and how much is this

m
NARRBEGIN: Silly Sally

er as
different from the original forecast?
Silly Sally, Inc. a. $408; $72 higher

co
Silly Sally, Inc. forecasts the following sales levels: January, b. $336; $93 lower

eH w
$420; February, $435; March, $450; and April, $470. c. $442; $13 higher
d. $429; $13 lower

o.
Historically, 40% of its sales are for cash. Of the remaining

rs e
sales, 80% are collected in one month, 15% are collected in
the second month, while the rest remain uncollected.
20. Consider the following information for Smart Products: total
ou urc
assets=$1000; sales=$1540; net profit margin=12%;
November sales were $380 and December sales were $500.
dividend payout ratio=40%; accounts payable=$308. If sales
(all values $000)
are forecast to increase 30%, what is the “short cut” estimate
o

of external funds required (EFR)?

Purchases are made at 60% of the next month’s sales
a. $64
aC s

forecast, and are paid for in the month of purchase. Other

b. $208
vi y re

cash outlays are: rent, $10 monthly; wages and salaries, $50 c. $300
monthly; a tax payment of $30 in March; an interest payment d. $462
of $15 in March; and a planned purchase of $20 of new fixed
assets in January. 21. Consider the following information for Smart Products: total
ed d

NARREND assets=$1000; sales=$1540; net profit margin=12%;

dividend payout ratio=40%; equity=$555. What is Smart
ar stu

14. Refer to Silly Sally, Inc. What is the forecasted amount to be Products’ sustainable growth rate?
collected from cash sales in March? a. 7%
a. $450 b. 13%
b. $360 c. 25%
is

c. $261 d. 52%
d. $180
Th

22. Financial planning encompasses all but the following:

15. Refer to Silly Sally, Inc. What are forecasted total cash a. setting long-run strategic goals
collection for January? b. investing the firms long-term cash
a. $420 c. preparing quarterly and annual budgets
sh

b. $442 d. all of the above

c. $168
d. $240 23. Which of the following make(s) the planning process more
complex than simply accepting all projects that look
16. Suppose Silly Sally, Inc. forecasts an ending cash balance of promising?
$20, its minimum desired balance, in January. If February’s a. limits on capital
forecasted cash expenditures are $400, which of the b. limits on production capacity
following describes the changes to Silly Sally’s cash balance c. limits on human resources
and level of borrowing, if any, related to its minimum cash d. all of the above
balance, at the end of February?
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24. With regard to planning the first priority for a firm that 30. You are a financial consultant to a company that asks you
competes by achieving lowest cost production might be what effect a change in leverage has on the firm’s sustainable
a. to determine whether it should make additional investments in order growth.
to achieve
Assuming
even greater
all other things remain constant and if the
production efficiences. percentage of assets that are financed with debt increases,
b. to assess whether new or expanded marketing programs might increase then the value
how of thethat
will brand relative
affect to sustainable growth rate?
the firm’s
those of competitors. a. the sustainable growth rate will decrease
c. to intensify its efforts to further discriminate its brand from that of its competitors.
b. the sustainable growth rate will increase
d. all of the above. c. the effect is indeterminable
d. the sustainable growth rate will neither decrease or increase
26. The responsibility to assess the feasibility of a strategic plan
given a firm’s existing and prospective sources of funding 31. A top-down approach to sales forecasting begins with
falls primarily to the a. a firmwide sales objective.
a. senior managment of the firm. b. a departmental head forecast.
b. finance function within the firm. c. a talk with the customer.
c. accounting function within the firm. d. none of the above.
d. marketing funciton within the firm.
32. A bottom-up approach to sales forecasting begins with
a. a firmwide sales objective.
27. Increases in assets must be accompanied by b. a departmental head forecast.
a. an increase in liabilities. c. a talk with the customer.
b. an increase in owners equity. d. none of the above.
c. equal amounts of a) and b).
d. some combination of a) and b). 33. The percentage-of-sales method for forecasting pro forma

m
er as
financial statements assumes
28. For the prior year, Billy Bob’s Dress Shop had a net profit a. that all income statement and balance sheet items

co
margin of 5% based upon a sales level of $100,000. It’s total grow in proportion to sales.

eH w
assets are $1,000,000 while its total equity is $300,000. If b. that all income statement and balance
sheet items grow at a growing proportion to sales.

o.
Billy Bob pays out 50% of its net income in dividends, then
c. that all income statement and balance sheet
rs e
what is the firm’s sustainable growth rate going forward?
items grow at a decreasing proportion to sales
ou urc
a. .84%
b. 8.00% d. none of the above.
c. 8.40%
d. none of the above 34. The Retail Company currently has assets of $3,000,000 and
o

accounts payable of $200,000. The firm’s sales last year

ANS: A were $10,000,000 with a net profit margin of 1%. If the firm
aC s

g* = {m(1-d)(A/E)} / [(A/S) - {m(1-d)(A/E)}] anticipates next year’s sales to grow by 8% over that of last
vi y re

year and the firm pays out 25% of its net income in
A/S = 10 , A/E = 3.3333, m = .05, (1-d) = .5 dividends, then what is the estimated external funds
requirement for Retail?
g* = .0084 or .84% a. $16,000
ed d

b. $81,000
ar stu

29. In the year just ended, Ellie May’s Power Tools had net c. $143,000
d. $240,000
income of $200,000 based upon a sales level of $1,500,000.
It’s total assets are $800,000 while its total equity is
ANS: C
$700,000. If Ellie May pays out 0% of its net income in
is

EFR = S (A/S) - S (AP/S) - mS(1+g)(1-d)

dividends, then what is the firm’s sustainable growth rate
going forward?
Th

a. .40% S = .08  10,000,000 = 800,000

b. 38%
c. 40% EFR = 800,000 (3/10) - 800,000 (.2/10) - .01 (10,000,000)
d. none of the above (1.08)(1-.25) = 143,000
sh

ANS: C 35. A firm currently has $2,000,000 in assets and $1,000,000 in

g* = {m(1-d)(A/E)} / [(A/S) - {m(1-d)(A/E)}] accounts payable. If the firm expects sales to increase by
10% from last year to next year, then what is the estimated
A/S = 8/15 , A/E = 8/7, m = 200,000/1,500,000, (1-d) = 1 external funds required if the firm pays all of its net income
to shareholders?
g* = .4 a. $100,000
b. $1,000,000
c. $2,000,000
d. none of the above
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 d none of the above.
ANS: A .
EFR = S (A/S) - S (AP/S) - mS(1+g)(1-d), since d = 1,
41. Cash receipts include
EFR = S (A/S) - S (AP/S) = A (S/S) - AP (S/S) = Ag - a. cash sales.
b. accounts receivable collections.
APg = g(A - AP) c. both a and b
d. none of the above.
EFR = .1 (2,000,000 -1,000,000) = 100,000
42. The Little Toy Company will start doing business in
36. Milton Gaming Company currently has assets of $3,000,000 February and needs to forecast its total cash receipts for
and accounts payable of $200,000. The firm’s sales last year April. Its projected total sales are $15,000, $20,000, and
were $10,000,000 . If the firm anticipates next year’s sales $25,000 for February, March and April, respectively. Little
to grow by 8% over that of last year and the firm pays out Toy anticipates that 50% of sales will be for cash and 1/2 of
25% of its net income in dividends, then what net profit credit sales will be collected the month after sale with the
margin is required in order to have the estimated external remained being collected 2 months after the sale. What the
funds required be equal to zero? the forecasted cash receipts to Little Toy in April?
a. 27.00% a. $21,250
b. 25.00% b. $17,500
c. 2.77% c. $8,750
d. 2.50% d. none of the above

ANS: C

m
ANS: A

er as
EFR = S (A/S) - S (AP/S) - mS(1+g)(1-d) April cash sales: 25,000  .5 = 12,500

co
April collections for March sales: 20,000  .5  .5 = 5,000

eH w
S = .08  10,000,000 = 800,000 April collections for Feb sales: 15,000  .5  .5 = 3,750

o.
800,000 (3/10) - 800,000 (.2/10) - m (10,000,000)(1.08)
(1-.25) = 0 rs e April total collections: 12,500 + 5,000 + 3,750 = 21,250
ou urc
43. Marsha Start is looking to restart a home economics related
224,000 = m (10,000,000)(1.08)(.75); m = .02765 business after an unfortunate incarceration. She forecasts
that sales for June, July, and August will be $100,000,
o

37. Which of the following is a source of discretionary or $150,000, and $100,000, respectively. Start expects for cash
external financing?
aC s

sales to make up 25% of the sales in each month with 90% of

a. a new debt issue
vi y re

the credit sales collected in the month after the sale and the
b. accounts payable remainder 2 months after the sale. What is Start’s estimated
c. a new equity issue
d. both a and c total cash collections for August?
a. $20,000
b. $101,750
ed d

38. If a company prefers to finance its required assets with a

c. $133,750
larger portion of short-term debt, then that firm is utlizing
ar stu

d. none of the above

a(n)
a. conservative financing strategy. ANS: C
b. aggressive financing strategy.
August cash sales: 100,000  .25 = 25,000
c. matching strategy.
is

d. none of the above.

August collections for July: 150,000  .75  .9 = 101,250
Th

39. If a company prefers to finance its required assets with a

small portion of short-term borrowings, then that firm is August collections for June: 100,000  .75  .1 = 7,500
utlizing a(n)
sh

a. conservative financing strategy. Total cash collections for August: 25,000 + 101,250 + 7,500
b. aggressive financing strategy. = 133,750
c. matching strategy.
d. none of the above.

40. A firm that tends to finance permanent assets with long-term

debt and seasonal assets with short-term borrowing is
following
a. an aggressive financing strategy.
. b. a conservative financing stragegy.
c. a matching financing strategy.
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 44. Marsha Start is looking to restart a home economics related
business after an unfortunate incarceration. 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 2 months after the sale. What is Start’s estimated
total cash collections in August for June sales?
a. $7,500
b. $101,750
c. $133,750
d. none of the above

ANS: A
June credit sales: .75  100,000 = 75,000
August collections in June: 75,000  .1 = 7,500

NARRBEGIN: Exhibit 18-1

Exhibit 18-1
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,

m
er as
February, March, and April, respectively. The firm purchases
25% of each amount in cash and will then pay 70% of the

co
eH w
credit purchase in the month following the purchase with the
remainder paid in full two months after the purchase.

o.
NARREND

rs e
ou urc
45. Refer to Exhibit 18-1. What is the amount of February sales
to be collected in March for the company?
a. $206,625
b. $105,000
o

c. $56,250
aC s

d. none of the above

vi y re

ANS: B
Feb Sales: 200,000
Credit sales in Feb: 200,000  .75 = 150,000
ed d

Feb sales collections in March: 150,000  .7 = 105,000

ar stu

46. Refer to Exhibit 18-1. What is the amount of February sales

to be collected in April for the company?
a. $206,625
is

b. $105,000
c. $45,000
Th

d. none of the above

ANS: C
Feb Sales: 200,000
sh

Credit sales in Feb: 200,000  .75 = 150,000

Feb sales collections in March: 150,000  .3 = 45,000

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