FREE Financial Forecasting And Planning Questions and Answers

Question 1

Financial forecasting typically starts by:

Accepted Answer

Sales forecast

Answer

Financial forecasting typically begins with a sales forecast because sales are the primary driver of most other financial activities within a company. Projected sales directly influence production levels, inventory requirements, accounts receivable, and ultimately, the revenue and profitability figures. Once sales are estimated, other financial statement items, such as cost of goods sold, operating expenses, and many balance sheet accounts, can be projected as a percentage of sales or based on the anticipated sales volume.

Question 2

The creditors use this financial statement to assess whether a company is making enough money to cover its debts.

Accepted Answer

Statements of profit or loss

Answer

Creditors primarily use the Statement of Profit or Loss (Income Statement) to assess a company's ability to generate sufficient earnings to cover its debt obligations. This statement details revenues, expenses, and net income over a period, directly revealing the company's profitability. Specifically, creditors look at earnings before interest and taxes (EBIT) to gauge how well a company can meet its interest payments, which is a key indicator of its debt-servicing capacity.

Question 3

AFN is an equation that illustrates the relationship between an organization's external funds and its .

Accepted Answer

Projected increase in assets, spontaneous increase in liabilities, and its increase in retained earnings

Answer

The Additional Funds Needed (AFN) equation is a financial forecasting tool that quantifies the external financing a company will require to support its projected growth. It illustrates the relationship between the funds needed for a projected increase in assets (driven by sales growth) and the funds automatically generated internally. Specifically, AFN is calculated as the projected increase in assets minus the spontaneous increase in liabilities and the increase in retained earnings, with any remaining deficit representing the external funds needed.

Question 4

Short-term loans are included in the spontaneous increase in liabilities in the AFN (Additional Funds Needed) equation.

Accepted Answer

FALSE

Answer

False. Spontaneous liabilities are those that automatically increase with sales, such as accounts payable and accrued expenses, without requiring explicit management action. Short-term loans, however, are not spontaneous liabilities. They represent a form of negotiated financing that management must actively arrange to cover any Additional Funds Needed (AFN) after accounting for spontaneous liabilities and retained earnings. Therefore, short-term loans are a discretionary financing source, not a spontaneous one.

Question 5

Profit retained for reinvestment is the accumulated business profit that is not distributed as a dividend to shareholders.

Accepted Answer

Retained earnings

Answer

Retained earnings represent the cumulative profits a company has earned over its lifetime that have not been distributed to shareholders as dividends. Instead, these profits are kept within the business for reinvestment in operations, expansion, or to strengthen its financial position. This allows the company to fund future growth and initiatives internally.

Finance for Non-Finance Managers Practice Test

Finance for Non-Finance Managers Practice Test

FREE Financial Forecasting And Planning Questions and Answers