Financial Forecasting and Budgeting

Question 1

A plan for controlling cash inflows and outflows business to balance income with expenditures.

Answer 1

Cash budgets

Question 2

What are the three key uses of cash budget?

Answer 2

• Future Financing Needs
• Corrective Action
• Performance Evaluation

Question 3

What are the key principles of effective budgeting?

Answer 3

1. Know Yourself
2. Understand the Key Areas of Savings, Income, and Expenses
3. Develop Savings, Income, and Expense Strategies
4. Keep Records
5. Use a Method That Meets Your Needs and Objectives
6. Eliminate Consumer Debt and Minimize Long-Term Debt

Question 4

When evaluating a company’s performance, what can variances on a company’s cash budget indicate?

1. Variances are not useful for performance evaluation of certain managers or divisions.
2. Variances show that expenses were necessarily greater than income for the budget horizon.
3. Variances show that certain managers or divisions are not meeting targets.
4. Variances are expected and should never pose a concern for management.

Answer 4

Variances show that certain managers or divisions are not meeting targets.

Cash budgets provide a basis for performance evaluation, and significant variance from predicted income, saving, and expense predictions indicates that management has not accurately assessed company operations.

Question 5

How far into the future do cash budgets usually forecast?

Between five and ten years
Between one month and one year
Between one and two weeks
Between one and three years

Answer 5

Between one month and one year

Cash budgets are not useful if they forecast less than one month, and it is not necessary for cash budgets to extend beyond one year in the future.

Question 7

What are three principles of budgeting that are important to know before beginning the budgeting process?

Eliminate debt, evaluate your personal financial performance, and consult a certified financial advisor
Improve your credit score; understand the key areas of savings, income, and expenses; and categorize all expenses
Know yourself, reduce variance in spending, and consult a certified financial advisor
Keep records; develop savings, income, and expense strategies; and use a method that meets your needs and objectives

Answer 7

Keep records; develop savings, income, and expense strategies; and use a method that meets your needs and objectives

ll three of these principles are included in the six principles of budgeting as discussed in the course. The other three principles are know yourself; understand the key areas of savings, income, and expenses; and eliminate consumer debt and minimize long-term debt.

Question 8

What are the three main uses of cash budgets?

1. Cash budgets are used to forecast future financial need, aid in performance evaluation, and show when corrective action is needed.
2. Cash budgets help companies know how much to invest in capital, aid in expense tracking, and predict when additional financing is needed.
3. Cash budgets allow periodic performance evaluation, inform investors of changes in net income, and allow businesses to gain access to credit.
4. Cash budgets show lenders how effective the management of a business is, allow for corrective action when needed, and increase a firm’s degree of leverage.

Answer 8

Cash budgets are used to forecast future financial need, aid in performance evaluation, and show when corrective action is needed.

A good cash budget is used in these ways to help a firm operate more effectively and efficiently.

Question 10

Creating a cash budget is a matter of understanding your business, understanding the timing of cash flows, and keeping track of borrowing requirements. It can be broken down into three steps:

Answer 10

1. Determine cash receipts
2. Estimate cash disbursements
3. Create the cash budget

Question 11

The five steps to create a budget for your personal finances are as follows:

Answer 11

1. Understand your goals
2. Track your savings, income, and expenses
3. Develop a cash budget (plan)
4. Implement your plan
5. Compare the cash budget to your actual spending and make necessary changes

Question 12

An expense that you do not have direct control over and that remains constant from period to period.

Answer 12

Fixed expenditures

Question 13

An expense that you have direct control over and that can change from period to period.

Answer 13

variable expenditures

Question 15

What is the correct order of the three steps necessary to create a cash budget?

1. Determine cash receipts, estimate cash disbursements, create the cash budget
2. Evaluate income, create the cash budget, estimate cash disbursements
3. Create the cash budget, determine cash receipts, estimate cash disbursements
4. Estimate cash disbursements, predict expenses, create the cash budget

Answer 15

Determine cash receipts, estimate cash disbursements, create the cash budget

Doing these three things in this order can help you understand your business, understand the timing of cash flows, and keep track of borrowing requirements.

Question 16

Why is “put $50 in a savings account each month for Christmas gifts” a better budgeting goal than “save money for Christmas gifts”?

1. Because “save money for Christmas gifts” is unattainable
2. Because it demonstrates a knowledge of the correct steps of cash budgeting
3. Because it is specific and measurable
4. Because $50 is a realistic amount to save each month

Answer 16

Because it is specific and measurable

Effective financial goals provide a specific and concrete target to focus on.

Question 17

Why would a monthly mortgage payment be considered a fixed expense?

1. Because the payments vary based upon the cost of the house
2. Because you have control over the amount you pay each month
3. Because the payment is the same amount each month
4. Because the bank changes the payment amount each month

Answer 17

Because the payment is the same amount each month

A mortgage is a fixed expense, meaning that the payment amount is the same each month. Knowing which of your expenses are the same from month to month will help you budget more accurately.

Question 18

Which action would help you make your budget more efficient?

Reduce your payments toward savings so you have enough for monthly expenses.
Create only two categories for expenses: necessary and unnecessary.
Every month, increase the allotted amounts for each category of your budget.
Compare your budgeted cash flows to your actual cash flows, and then revise the budget if necessary.

Answer 18

Compare your budgeted cash flows to your actual cash flows, and then revise the budget if necessary

This would allow you to keep your budget updated and effective so you can make the best use of your money.

Question 19

Which item is an example of a cash receipt in a personal budget?

1. A payment of $125 for an annual doctor’s visit
2. A ski pass worth $65 that your roommate gives you in exchange for borrowing your car
3. A purchase of $53 for groceries and toiletries for the week
4. A graduation gift of $100 from your grandmother

Answer 19

A graduation gift of $100 from your grandmother

Since this is money, or income, coming into your cash budget, it represents a cash receipt.

Question 20

Which item represents an example of a cash disbursement a business might have this month?

1. A purchase of inventory on credit that will be paid off next month
2. A collection of accounts receivable on sales made last month
3. Interest earned on bank deposits held by the firm.
4. A rent check paid and cashed for the warehouse the company uses

Answer 20

A rent check paid and cashed for the warehouse the company uses

Since this expense is being paid this month and the cash is being withdrawn from the company’s account, this represents an example of a cash disbursement.

Question 21

What three things should be included in a cash budget for a business?

1. Cash receipts, cash disbursements, and borrowing
2. Sales, expenses, and borrowing
3. Income, expenses, and savings
4. Cash receipts, cash disbursements, and savings

Answer 21

Cash receipts, cash disbursements, and borrowing

All three of these things affect cash flows in a business and should be included in a cash budget.

Question 22

Which items are considered cash disbursements for a business?

1. Dividends, investments, cash sales, and tax liabilities
2. Raw materials, rent, administrative expenses, interest, and selling expenses
3. Rent, accounts receivable, accounts payable, and raw materials
4. Cash sales and accounts receivable

Answer 22

Raw materials, rent, administrative expenses, interest, and selling expenses

These are common products or services that a firm pays cash for during a specified period in order to generate sales.

Question 23

Why are sales not strictly considered to be the same thing as cash receipts?

Sales include expenses outside of the cash budget.
Sales are not liquid enough to be considered a form of cash flow.
Sales are not measured on a monthly basis and thus cannot be included in a cash budget.
Sales include both cash sales and credit sales.

Answer 23

Sales include both cash sales and credit sales.

Sales made on credit are not considered a cash receipt until the time period in which they are collected.

Question 24

What is the main reason why it is important to track and record cash flows?

Tracking your cash flows allows you to increase your annual income by knowing your previous income.
Tracking your cash flows allows you to recognize where and how your money is spent so you can monitor your cash flows and revise your budget as needed.

Answer 24

Tracking your cash flows allows you to recognize where and how your money is spent so you can monitor your cash flows and revise your budget as needed.

This is the first step in the budgeting process, and it is necessary in order to have an accurate budget going forward.

Question 25

n what situation might the software method of tracking be preferable to the spreadsheet method of tracking?

When a person has a lot of free time and likes to record each cash flow by hand
When a person has a hard time remembering to record their cash flows and when they prefer to use a card to make purchases
When a person prefers to use cash to make purchases and is very good about remembering to track cash flows
When a person needs cash flow information for tax purposes

Answer 25

When a person has a hard time remembering to record their cash flows and when they prefer to use a card to make purchases

The software method is convenient for busy people who do not want to use cash or record cash flows by hand.

Question 26

What is the purpose of monitoring your cash flows?

1. Monitoring is used to identify the degree to which a business is leveraged so that the business can determine when it will be most profitable to repay outstanding loans.
2. Monitoring allows you to evaluate whether your actual cash flows are in line with your goals and to understand when correction or revision is needed.
3. Monitoring allows you to implement changes to your budget gradually in such a way that the changes go smoothly and efficiently.
4. Monitoring is the process by which firms prove to lenders that they have sufficient cash flow to pay back a short-term loan.

Answer 26

Monitoring allows you to evaluate whether your actual cash flows are in line with your goals and to understand when correction or revision is needed.

If a business did not monitor its budget, then tracking cash flows would be useless, and the business would not know if it was on track to reach its goals.

Question 27

Which processes help you identify and fix problems in your budget?

Tracking allows you to identify problems, and then subsequent monitoring allows you to fix those problems.
When you spend too much in a category of your budget, you have identified a problem, which you can fix by increasing the allotted amount in that category for next month.
Monitoring your budget allows you to identify problems, and then gradual revision and implementation of new processes allow you to fix those problems.
Revision allows you to identify problems in your budget, and then tracking allows you to fix those problems immediately so that you can then monitor progress.

Answer 27

Monitoring your budget allows you to identify problems, and then gradual revision and implementation of new processes allow you to fix those problems.

This assures that the budget is as effective as possible at helping you reach your financial goals.

Question 28

{BLANK} is the process of recording cash flows.

Answer 28

Tracking

Question 29

Methods of tracking a budget include the {BLANK}, {BLANK}, and {BLANK}.

Answer 29

• envelope method
• spreadsheets
• software

Question 30

{BLANK} does not just mean checking to make sure that you are not overspending but also analyzing data and looking for any alarming patterns.

Answer 30

Monitoring

Question 31

The projection of future earnings after all projected costs are subtracted from projected sales.

Answer 31

Profit forecasting

Question 32

Using sales growth and the profit forecast to construct a pro forma balance sheet to understand the future implications of the sources and uses of finances.

Answer 32

Balance sheet forecasting

Question 33

The additional financing needed given a firm’s expectations for future growth.

Answer 33

discretionary financing needed (DFN)

Question 34

What are the key financial forecasts?

Answer 34

• Profit forecasting
• Balance sheet forecasting

Question 35

How does financial forecasting help with financial decision-making?

1. It helps decision makers understand the impacts of today’s actions on the future performance of the firm.
2. It helps managers analyze how the firm has been performing over the past several years.
3. It helps decision makers see a detailed map of the future performance of the firm.
4. It helps managers understand what key assumptions to make for the future.

Answer 35

It helps decision makers understand the impacts of today’s actions on the future performance of the firm.

This is the purpose of financial forecasting.