Financial Planning

Question 1

What is a Static Budget?

Answer 1

Budget targeted for a specific segment of a company.

Question 2

What is a Master Budget?

Answer 2

Budget targeted for the company as a whole

Includes budgets for Operations and Cash Flows

Includes set of budgeted Financial Statements

Question 3

How do Fixed Costs affect budgeting?

Answer 3

Costs independent of the level activity within the relevant range

Property Tax is the same whether you produce 100-000 units or zero units

However - Fixed Costs per unit vary given the amount of activity

If you produce fewer units- fixed costs per unit will be greater than if you produce more units - i.e. less units to spread the cost over

Question 4

How do Variable Costs affect budgeting?

Answer 4

The more Direct Materials or Direct Labor used- the more Variable Costs per unit

However - Variable Costs per unit don’t change with the level of activity like Fixed Costs per unit

Question 5

How are Material Variances calculated?

Answer 5

SAM:

Standard Material Costs
- Actual Material Costs
= Material Variance

Question 6

How are Labor Variances calculated?

Answer 6

SAL

Standard Labor Costs
- Actual Labor Costs
= Labor Variance

Question 7

How are Overhead Variances calculated?

Answer 7

OAT

Overhead Applied
- Actual Overhead Cost
= Total Overhead Variance

Question 8

How does Absorption Costing compare to Variable Costing?

Answer 8

Absorption Costing - External Use- Cost of Sales- Gross Profit- SG&A

Variable Costing - Internal Use- Variable Costs- Contribution Margin- Fixed Costs

Question 9

How is Contribution Margin calculated?

Answer 9

Sales Price (per unit)
- Variable Cost (per unit)
= Contribution Margin (per unit)

Question 10

How is Break-even Point (per unit) calculated?

Answer 10

Total Fixed Costs / Contribution Margin (per unit)
= Break-even Point Per Unit

Assumption: Total Costs & Total Revenues are LINEAR

Question 11

What is the focus in a Cost Center?

Answer 11

Management is concerned only with costs

Question 12

What is the focus in a Profit Center?

Answer 12

Management is concerned with both costs and profits

Question 13

What is the focus in an Investment Center?

Answer 13

Management is concerned with costs- profits- and assets

Question 14

What is the Delphi technique?

Answer 14

Forecasting technique where Data is collected and analyzed

Requires judgement/consensus

Question 15

What is Regression Analysis?

Answer 15

A forecasting technique where Sales is the dependent variable.

Simple Regression - One independent variable

Multiple Regression - Multiple independent variables

Question 16

What are Econometric Models?

Answer 16

Forecast sales using Economic Data

Question 17

What are Naive Forecasting Models?

Answer 17

Very Simplistic

- Eyeball past trends and make an estimate

Question 18

How does a Moving Average compare to Exponential Smoothing?

Answer 18

Both project estimates using average trends from recent periods

Difference: Exponential Smoothing weighs recent data more heavily

Question 19

What are the characteristics of Short-term Cost Analysis?

Answer 19

Uses Relevant Costs Only

Ignore Sunk Costs

Opportunity Cost is a Must

Question 20

What is a sensitivity analysis?

Answer 20

It reveals how sensitive expected value calculations are to the accuracy of the initial estimate. “what if” questions

A trial and error method (by compute software). Example is capital budgeting.

Question 21

What is a simulation analysis?

Answer 21

It represents a refinement of standard probability theory done by compute. Very expense, unless project is very large and expensive, a full-scale simulation normally not worth it.

Question 22

What is a Monte Carlo Technique?

Answer 22

used in simulation to generate individual values for a random variable. if done a large number of times, the distribution of results from the model will be obtained.

Question 23

What is a simple Interest ST Loan?

Int Exp Formula?

Answer 23

Is one in which the interest is paid at the end of the loan term.
Int Exp = Principal of loan x stated rate

Question 24

How do you calculate the eff int rate of a loan?

Answer 24

the ratio of the amount the company must pay to the amount the company gets use of (loan - origination fee).

Eff Int Rate = Int Expense / usable funds (net proceeds)

Question 25

What is a discounted loan?

Answer 25

One in which the interest and finance charges are paid at the beginning of the loan term.

Total Borrowing = Amt needed / (1.0 - stated rate)

Eff Int Rate = Int Expense / usable funds

Question 26

What are the two ways of calculating the effective interest rates?

Answer 26

A. Eff Int Rate = Int Expense paid / usable funds

or

B. Stated Rate % / (1.0 - Stated Rate %)

Question 27

What is a discounted loan?
How is the total borrowing calculated?
How is the effective interest rate calculated?

Answer 27

One in which the interest and finance charges are paid at the beginning of the loan term.

Total Borrowing = Amt needed / (1.0 - stated rate)

Eff Int Rate = Int Expense / usable funds

Question 28

What are loans with compensating balances?
How is the total borrowing calculated?
How is the effective interest rate calculated?

Answer 28

To reduce risk, banks sometimes require borrowers to maintain a compensating balance during the term of a financing agreement.

Total Borrowing = Amount needed / (1.0 - compensating balance %)

Eff Int Rate = Net Int Expense / usable funds
or State Rate % / 1.0 - Comp Balance %)

Question 29

What is a tax shield?

Answer 29

it is something that will protect income against taxation. Thus, a depreciation tax shield is a reduction in income taxes due to a company being allowed to deduct depreciation against otherwise taxable income.

Question 30

What is the Net Present Value Calculation?

Answer 30

\+ Cash Inflow (Gross)
- Cash Outflows (Gross)
- Depr Exp
= Net Cash X (1 - tax rate)
= After Tax Net Cash
\+ Depr Exp
= THis amount X NPV Disc. Rate (PV of Ordinary Annuity)
= PV of saving
\+ Discounted Salvage value (SV * PV of $1) 
-  Initial Investment