1. The Willsey Merchandise Company has budgeted $40,000 in sales for the month of December. The company's cost of goods sold is 30% of sales. If the company has budgeted to purchase $18,000 in merchandise during December, then the budgeted change in inventory levels over the month of December is:
Answer
Correct Answer:
$ 6,000 increase.
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2. Which of the following is NOT true about the Master Budget?
Answer
Correct Answer:
All of the above are true.
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3. The process of planning future business actions and expressing those plans in a formal manner, usually in monetary terms, is called budgeting.
Answer
Correct Answer:
True
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4. Accounts payable represent a spontaneous form of financing for a firm.
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Correct Answer:
True
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5. To determine the amount of discretionary funds needed, you would subtract the expected increase in liabilities from the sum of the expected increases in retained earnings and assets.
Answer
Correct Answer:
False
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6. The Stuff Antique Store has current sales of $12 million and predicts next year's sales will grow to $16 million. Current assets are $3 million and fixed assets are $4 million. The firm's net profit margin is 6 percent after taxes. Presently, Stuff has $800,000 in accounts payable, $1.1 million in long-term debt, and $5 million (including $2.5 million in retained earnings) in common equity. Next year, Stuff projects that current assets and liabilities will rise in direct proportion to the forecasted sales, and that fixed assets will rise by $600,000. The Stuff Antique Store plans to pay dividends of $400,000 to common shareholders. What are Stuff's total financing needs and discretionary financing needs for the upcoming year?
Answer
Correct Answer:
$8.6 million and $.27 million.
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7. The first step involved in predicting financing needs is:
Answer
Correct Answer:
Project the firm's sales revenues and expenses over the planning period.
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8. A firm is using the DFN model to forecast the additional capital that they need to raise because of a sales increase. Which of the following factors are likely to increase the DFN?
Answer
Correct Answer:
The firm has a high dividend payout ratio.
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9. Which of the following work to automatically reduce the need for discretionary financing as sales increase?
Answer
Correct Answer:
Both a and b above
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10. At the sustainable rate of growth, the company does not need any additional assets to support the increased sales.
Answer
Correct Answer:
False
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11. If there exist economies of scale in inventory investment, the percent of sales method is likely to overstate additional asset needs for a given increase in sales.
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Correct Answer:
True
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12. The presence of excess capacity increases the need for discretionary financing for any level of sales increase.
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Correct Answer:
False
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13. A firm’s sustainable rate of growth (g*) is determined by which of the following:
Answer
Correct Answer:
G* = ROE(1 - b).
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14. Which of the following would decrease the need for additional discretionary financing, everything else constant?
Answer
Correct Answer:
The firm retained a higher percentage of earnings.
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15. Which of the following would be classified as spontaneous liabilities?
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Correct Answer:
Accounts payable
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16. A flexible budget differs from a fixed budget in that more than one set of input values for variables such as Sales are used.
Answer
Correct Answer:
True
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17. Which of the following items would NOT be included in the cash budget?
Answer
Correct Answer:
Depreciation charges
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18. Budgets perform the function of:
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Correct Answer:
Providing the basis for taking corrective action.
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