CAT Financial Planning & Forecasting 3 — Questions and Answers
Question 1: In exponential smoothing, what does a higher smoothing constant (α closer to 1) indicate?
- More weight is given to the most recent data (Correct answer)
- More weight is given to older historical data
- The forecast is entirely based on averages
- Seasonal adjustments are ignored
Correct answer: More weight is given to the most recent data
A smoothing constant close to 1 places almost all weight on the most recent observation.
Question 2: Which budget is typically prepared first when building a master budget?
- Sales budget (Correct answer)
- Production budget
- Cash budget
- Overhead budget
Correct answer: Sales budget
The sales budget is prepared first because all other budgets (production, purchases, cash) depend on forecast sales volume.
Question 3: A company has a net profit margin of 8% and forecasts sales of $2,500,000. What is the projected net profit?
- $200,000 (Correct answer)
- $250,000
- $180,000
- $225,000
Correct answer: $200,000
$2,500,000 × 0.08 = $200,000.
Question 4: Which of the following is an example of a qualitative forecasting technique?
- Delphi method (Correct answer)
- Time series analysis
- Linear regression
- Moving average
Correct answer: Delphi method
The Delphi method gathers expert opinions iteratively, making it a qualitative rather than quantitative technique.
Question 5: A favorable cost variance means:
- Actual costs were lower than budgeted costs (Correct answer)
- Actual costs were higher than budgeted costs
- Actual costs equaled budgeted costs
- Budgeted costs were not set correctly
Correct answer: Actual costs were lower than budgeted costs
A favorable variance on costs means the company spent less than planned, which is positive for profitability.
Question 6: A zero-based budget (ZBB) requires managers to:
- Justify every expense from scratch regardless of prior year spending (Correct answer)
- Add a fixed percentage increase to last year's budget
- Focus only on new projects and initiatives
- Carry forward all approved prior-year expenditures automatically
Correct answer: Justify every expense from scratch regardless of prior year spending
ZBB starts from a 'zero base' and requires every cost to be justified anew for each budget period.
Question 7: Which financial statement is most directly produced by a cash flow forecast?
- Projected cash flow statement (Correct answer)
- Projected income statement
- Projected balance sheet
- Statement of changes in equity
Correct answer: Projected cash flow statement
A cash flow forecast directly estimates future cash inflows and outflows, producing a projected cash flow statement.
CAT Financial Planning & Forecasting 3
In exponential smoothing, what does a higher smoothing constant (α closer to 1) indicate?