Financial Planning and Forecasting Course Quiz
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Questions and Answers

What is the main purpose of a strategic plan?

  • To assess employee performance
  • To establish the direction of an organization (correct)
  • To determine annual profit margins
  • To outline the organizational hierarchy

Which year had the highest net sales according to the sales forecast?

  • 201e
  • 201d
  • 201c
  • 201f (correct)

What does the AFN equation help determine?

  • The additional funds needed for company expansion (correct)
  • The total revenue for the next fiscal year
  • The current asset valuation
  • The expected cash flow in the upcoming months

How do financial forecasts differ from historical financial statements?

<p>Forecasts project future financial situations whereas historical statements show past performance (A)</p> Signup and view all the answers

What is one component that is not part of a strategic plan?

<p>Sales Revenue (C)</p> Signup and view all the answers

What is the inventory conversion period for GFI?

<p>60 days (C)</p> Signup and view all the answers

Which of the following best describes the average collection period (ACP) for GFI?

<p>60 days (C)</p> Signup and view all the answers

What is the duration of the payables deferral period for GFI?

<p>40 days (D)</p> Signup and view all the answers

How long does it take for GFI to convert merchandise into cash after making a purchase?

<p>120 days (B)</p> Signup and view all the answers

How does the length of the average collection period affect GFI's cash flow?

<p>It lengthens the cash flow cycle. (A)</p> Signup and view all the answers

Which financing policy involves using more short-term sources to finance permanent assets?

<p>Aggressive approach (D)</p> Signup and view all the answers

What financing strategy does a firm adopt when it cannot match assets with liabilities?

<p>Conservative financing policy (B)</p> Signup and view all the answers

What does the Cash Conversion Cycle (CCC) measure?

<p>Time taken to convert investments into cash flows (B)</p> Signup and view all the answers

If Great Fashions Inc. purchases P5,500,000 in merchandise, when are they expected to pay their suppliers?

<p>After 40 days (C)</p> Signup and view all the answers

How long does Great Fashions Inc. plan to sell their merchandise after purchase?

<p>60 days (A)</p> Signup and view all the answers

Which financing policy involves using primarily long-term sources for asset acquisition?

<p>Conservative approach (A)</p> Signup and view all the answers

What is a characteristic of an aggressive financing policy?

<p>Relies heavily on short-term borrowing (A)</p> Signup and view all the answers

In a conservative financing policy, how is short-term finance utilized?

<p>Partially for temporary current assets (B)</p> Signup and view all the answers

What is the formula used to calculate net working capital?

<p>Current Assets - Current Liabilities (A)</p> Signup and view all the answers

Which of the following represents net operating working capital?

<p>Operating Current Assets - Operating Current Liabilities (A)</p> Signup and view all the answers

What does the term 'working capital' historically refer to according to the peddler analogy?

<p>The merchandise a peddler sold to generate profits (B)</p> Signup and view all the answers

How does the turnover of working capital affect a peddler's profitability?

<p>Faster turnover increases profits due to more sales (B)</p> Signup and view all the answers

Which of the following is a component of current liabilities?

<p>Accounts payable (C)</p> Signup and view all the answers

Current assets do NOT include which of the following?

<p>Accounts payable (B)</p> Signup and view all the answers

What primarily determines working capital's impact on a company?

<p>Investment policies related to current assets (C)</p> Signup and view all the answers

In the context of working capital, what aspect relates directly to a company's liquidity?

<p>Net operating working capital (A)</p> Signup and view all the answers

What does the inventory conversion period indicate about GFI's merchandise?

<p>It takes GFI 90 days to sell its merchandise. (B)</p> Signup and view all the answers

How is the inventory conversion period calculated for GFI?

<p>By dividing inventory by cost of goods sold per day. (C)</p> Signup and view all the answers

What is the average collection period for GFI, also known as days sales outstanding (DSO)?

<p>90 days (A)</p> Signup and view all the answers

Which of the following is true regarding the data used to compute the average collection period for GFI?

<p>It uses annual sales in the denominator. (A)</p> Signup and view all the answers

What does a difference between the actual CCC and the forecasted value indicate?

<p>Real-world complexities affect cash flow cycles. (D)</p> Signup and view all the answers

What financial metric is used as the basis for the denominator when calculating the inventory conversion period?

<p>Cost of goods sold (A)</p> Signup and view all the answers

In the context of GFI's financial situation, what does it mean if the company has a long inventory conversion period?

<p>The company faces challenges in selling merchandise. (D)</p> Signup and view all the answers

What common mistake might someone make regarding the calculation of the average collection period?

<p>Using cost of goods sold instead of sales. (D)</p> Signup and view all the answers

What is the payables deferral period for GFI?

<p>54 days (D)</p> Signup and view all the answers

What is the difference between GFI's actual cash conversion cycle (CCC) and the planned CCC?

<p>46 days (C)</p> Signup and view all the answers

How is GFI's actual cash conversion cycle (CCC) calculated?

<p>Sales days + Collection days - Payable days (A)</p> Signup and view all the answers

What should the CFO of GFI focus on to improve the company's cash conversion cycle?

<p>Speed up sales and accelerate collections (C)</p> Signup and view all the answers

What is a primary purpose of a cash budget for firms?

<p>To forecast future cash receipts and disbursements (D)</p> Signup and view all the answers

What characteristic is typical for a cash budget developed by firms?

<p>It's often created in daily and monthly formats (D)</p> Signup and view all the answers

Which factor contributes to GFI's longer than planned cash conversion cycle?

<p>Delayed supplier payments (C)</p> Signup and view all the answers

What action could potentially improve GFI's profits and stock price?

<p>Extending payment terms with suppliers (B)</p> Signup and view all the answers

What percentage of the current month's sales are collected during the month of sale?

<p>20% (D)</p> Signup and view all the answers

How much are the purchases calculated based on the next month's sales?

<p>$280,000,000 (A)</p> Signup and view all the answers

What is the total amount of payments made for wages and salaries in the second month?

<p>$50,000,000 (B)</p> Signup and view all the answers

What is the net cash flow (NCF) for the month with $400,000,000 in total collections?

<p>$43,600,000 (A)</p> Signup and view all the answers

During which month are collections from the prior month's sales received?

<p>First month after sales (B)</p> Signup and view all the answers

What is the total amount collected from sales during the second month after sales?

<p>$40,000,000 (A)</p> Signup and view all the answers

What are the total payments made during the month that has $500,000,000 sales?

<p>$230,000,000 (B)</p> Signup and view all the answers

How much are the lease payments made each month?

<p>$15,000,000 (D)</p> Signup and view all the answers

What total collections are recorded for the month after $250,000,000 in sales?

<p>$313,400,000 (B)</p> Signup and view all the answers

What is accounted for in the total payments made in the month immediately following $300,000,000 in sales?

<p>Materials, wages, and other expenses (B)</p> Signup and view all the answers

Flashcards

Strategic Plan

A document outlining an organization's future direction.

Sales Forecast

A prediction of future sales revenue.

AFN (Additional Funds Needed)

Extra resources a company needs to grow.

Forecasted Financial Statements

Predicted financial reports for the future.

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Financial Forecasting

Estimating future financial outcomes for a business.

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Working Capital

The difference between a company's short-term assets (like cash, accounts receivable, inventory) and short-term liabilities (like accounts payable).

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Net Working Capital (NWC)

Another term for working capital.

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Current Assets

Assets that can be converted into cash within a year, such as cash, accounts receivable, and inventory.

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Current Liabilities

Debts that are due within a year, such as accounts payable, salaries, and short-term loans.

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Net Operating Working Capital

The difference between operating current assets and operating current liabilities.

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What is the role of working capital in a business?

Working capital is essential for a business to operate smoothly and efficiently. It allows companies to purchase inventory, pay suppliers, and meet short-term financial obligations. Adequate working capital ensures that the company can meet its short-term financial needs and avoid financial distress.

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How does working capital relate to profitability?

The way a company manages its working capital directly impacts its profitability. Efficient working capital management can lead to increased sales, reduced expenses, and higher profits.

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What is the 'working capital cycle'?

The 'working capital cycle' refers to the time it takes for a company to convert its investment in inventory into cash. This involves purchasing raw materials, producing goods, selling them, and collecting payment from customers.

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Inventory Conversion Period

The average time it takes to transform raw materials into finished products and sell them. This reflects how quickly inventory is turned into cash.

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Average Collection Period (ACP)

The average time it takes to receive payment from customers after a sale. It measures how long a company has to wait for cash from its receivables.

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Days' Sales Outstanding (DSO)

Another name for the Average Collection Period (ACP), indicating the average number of days it takes to collect cash from customers.

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Payables Deferral Period

The average time between purchasing materials and labor and paying for them. This shows how long a company can hold off on making payments to its suppliers.

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Cash Conversion Cycle

The time it takes for a company to convert its investments in inventory and other resources into cash. It combines the inventory conversion period, average collection period, and payables deferral period.

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Cash Conversion Cycle (CCC)

The time period it takes a company to convert its investments in inventory and receivables into cash from sales.

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Average Collection Period (ACP), or Days Sales Outstanding (DSO)

The average time it takes a company to collect payment from its customers.

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Cost of Goods Sold (COGS)

The direct costs associated with producing the goods sold by a company, including raw materials, labor, and manufacturing overhead.

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How is Inventory Conversion Period Calculated?

Inventory Conversion Period = (Average Inventory / Cost of Goods Sold per Day) * 365

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How is Average Collection Period (ACP) Calculated?

Average Collection Period (ACP) = (Accounts Receivable / Sales per Day) * 365

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What is the difference between CCC and theoretically projected CCC?

The actual CCC based on financial statements might differ from the theoretical forecast because of real-world complexities like shipping delays and customer payment delays.

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Why are Sales used instead of COGS for ACP?

Receivables are recorded at the sales price. Therefore, annual sales, not the cost of goods sold, are used in the denominator for ACP calculation.

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Aggressive Financing Policy

A strategy where a firm primarily relies on short-term financing, including both short-term and long-term sources. This approach involves frequent borrowing renewals and carries a higher risk due to potential challenges in repaying short-term debts.

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Moderate Current Assets Financing Policy

A balanced strategy where a firm aims to match the maturity of its assets with its liabilities. This approach avoids excessive reliance on short-term or long-term financing, seeking a middle ground.

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Conservative Financing Policy

A cautious approach where a firm predominantly utilizes long-term financing for both permanent and current assets. This strategy minimizes the risk of short-term debt and emphasizes financial stability.

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What is the impact of a longer CCC?

A longer CCC signifies that a company takes more time to recover its investment in inventory and resources, potentially indicating inefficiencies in its operations. This can impact profitability if tied up cash is not generating returns.

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How can a company improve its CCC?

A company can shorten its CCC by accelerating inventory turnover, speeding up collections from customers, and delaying payments to suppliers. This can free up cash for other critical activities.

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What is the importance of understanding the CCC?

Understanding the CCC helps a company identify areas for improvement regarding its cash flow management. It provides valuable insights into its working capital efficiency and can guide strategic decisions.

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How does the CCC relate to a company's profitability?

A shorter CCC can lead to improved profitability by freeing up cash for investments and reducing borrowing needs. A longer CCC can strain cash flow and reduce profitability by tying up capital in inventory and receivables.

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What does a longer CCC mean?

A longer CCC means a company takes longer to turn its investments into cash, which can limit its ability to invest in growth and could lead to financial problems.

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Why is it important to shorten the CCC?

Shortening the CCC improves efficiency and profitability. It means a company is getting its cash faster, allowing it to reinvest in the business. This can lead to increased sales and profits.

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How can a company shorten its CCC?

A company can shorten its CCC by selling products quicker, getting customers to pay faster, and negotiating longer payment terms with suppliers.

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Cash Budget

A financial plan showing a company's expected cash inflows and outflows over a period. Helps companies manage liquidity and plan for future cash needs.

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What are the benefits of a cash budget?

Helps companies avoid cash shortages, plan for investments, make funding decisions (like loans), and make informed decisions about production and operations.

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Purchases

The amount of materials a company plans to buy for production.

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Collections

The cash a company receives from its customers.

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Payments

The cash a company spends on expenses like wages, materials, and rent.

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Net Cash Flow (NCF)

The difference between a company's cash inflows (collections) and cash outflows (payments).

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Cumulative NCF

The total net cash flow accumulated over a period.

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What is the relationship between sales and collections?

Collections represent the cash received from sales. The timing of these collections determines when a company receives cash from its customers.

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What are the key expenses a company typically has to pay for?

Common expenses include wages, materials, rent (lease payments), and other miscellaneous expenses.

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How is a company's net cash flow calculated?

Net cash flow for a month is calculated by subtracting total payments from total collections. This shows whether the company generated more cash than it spent.

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What does the cumulative NCF tell us?

The cumulative NCF reveals the overall cash flow position of the company over a period. It shows the total amount of money available after factoring in all cash inflows and outflows.

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Study Notes

Financial Planning and Forecasting

  • This course covers strategic planning, sales forecasting, the AFN equation, forecasted financial statements, and associated tasks, homework, and online learning tools.

Strategic Planning

  • A strategic plan outlines an organization's direction.
  • It includes:
    • Mission Statement
    • Corporate Scope
    • Statement of Corporate Objectives
    • Corporate Strategies
    • Operating Plan
    • Financial Plan

The Sales Forecast

  • Shows projected net sales for future periods.
  • Data for 201a-201f are provided.

The AFN Equation

  • AFN (Additional Funds Needed) calculates extra financial resources needed for expansion.
  • Components include:
    • Projected increase in assets
    • Spontaneous increase in liabilities
    • Increase in retained earnings

Forecasted Financial Statements

  • Historical statements show past performance.

  • Forecasts project a future financial situation.

  • Performance Task 1: Students must complete a task based on financial planning and forecasting concepts.

  • Homework 1: Students need to submit homework before the final exam.

  • eLMS Quiz 1: Online quiz covering financial planning and forecasting topics.

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Description

Test your understanding of financial planning and forecasting concepts, including strategic planning, sales forecasting, the AFN equation, and forecasted financial statements. This quiz covers key components necessary for effective financial management. Prepare to demonstrate your knowledge in these fundamental areas!

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