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Final Test Chapter 7 Finance
Introduction to Finance (FIN2303)
Algonquin College
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Chapter 7
Planning, Budgeting and Controlling
REVIEW QUESTIONS
1. What is the connection between SWOT analysis and planning assumptions?
SWOT analysis is the process of identifying a company’s strengths and weaknesses
(internal analysis) and opportunities and threats (external environment). This analysis
helps managers to formulate planning assumptions, which establish boundaries upon
which a company’s plans and budgets are based.
2. What is the relationship between planning assumptions and budgeting?
Planning assumptions set the boundaries within which priorities, goals, and plans are
established which helps to determine who is going to do what, when, how, and where.
Budgeting has to do with the allocation of resources
3. What is planning and why is it so important?
Planning is the process of formulating goals and outlining action plans to realize the
goals. Planning is important because it forces managers to be more creative; helps
integrate short-term plans with long-term plans; provides a sense of purpose and
direction; enables a business to cope with change; and simplifies managerial control.
4. What is the difference between a performance indicator and a performance standard?
A performance indicator describes the type of measurement to be used to gauge
organizational performance while a performance standard is a benchmark (number)
against which performance is measured.
5. What is the purpose of SWOT analysis?
SWOT analysis is the first step in the planning process which forces managers to
analyze (1) their company’s internal activities or functions for the purpose of
identifying their strengths and weaknesses, and (2) their external environment to
pinpoint the opportunities and threats.
7-2 Chapter 7 Planning, Budgeting, and Controlling 6. Why are planning assumptions useful? Planning assumptions establish boundaries within which company plans and budgets are established. They also help various divisional managers within an organization to be consistent in developing their objectives, plans, budgets, and financial projections. 7. What is budgeting? Budgeting is the process by which management allocates corporate resources, evaluates the financial outcome of its decisions, and establishes the financial and operational profile against which future results will be measured. 8. Why is budgeting so important? Budgeting is important because it translates corporate intentions into specific tasks and identifies the resources needed by managers to accomplish these tasks. 9. Explain budgeting in terms of planning as a whole. Budgeting is just one component of a plan. The plan must be created first, and then strategic and operational goals must be established, along with strategic plans to accomplish them, from which priorities are set. Managers develop division and sales budgets; after approval, all budgets are consolidated in a master budget and financial plan for review. 10. What are operating budgets? Operating budgets are the budgets that detail the costs of operating the business. They include the sales budgets, manufacturing budgets, and staff or overhead budgets. 11. Differentiate between incremental budgeting and zero-based budgeting. Incremental budgeting involves adding projected new expenses to the previous year's total expenses and expressing them as percentages of the previous year's total. Zero- based budgets, on the other hand, assume that every budget dollar requires justification; all dollars, including last year's authorized expenditures and new requests are equally scrutinized. 12. Why is the balanced scorecard so effective as a management tool? The balanced scorecard has the power to translate the mission statement, the value goals, the vision statement, and the strategies into measurable targets and action plans in addition to being capable of gauging to what extent overall targets are being realized.
7-4 Chapter 7 Planning, Budgeting, and Controlling 19. Explain Altman’s financial health formula. Altman's financial health formula involves multiplying each of five financial statement ratios by a particular weighting factor, then adding the results to obtain a Z-score. A Z-score of 3 or better is the safe zone, and one of 1 or lower may lead to bankruptcy. Values in between 3 and 1 are a grey zone that could tip the business in either direction. 20. What is controlling? Controlling is establishing strategic and operational control points to ensure that objectives and plans are realized. 21. Explain the various steps involved in the control system. There are six steps in the control system. (1) The control system must be designed to fit the culture of the organization and benefit managers and employees at all levels. (2) Performance indicators must be established for measuring accomplishments; the key elements of costs and benefits are determined and the elements that need to be measured are selected. (3) Performance standards are determined that pinpoint the standards applicable for a particular time period so results can be compared. (4) Performance is measured at planned intervals. (5) Variations between standards and results are analyzed to determine the reasons for the variances. (6) Corrective action is taken to solve the problems revealed by the variances. 22. Comment on the various types of performance standards. Performance standards can be time, output, cost, and quality. Time standards determine the length of time to perform a specific task, such as the time to resolve a customer complaint. Output standards measure the number of units that should be produced by individuals or groups, such as the number of contracts signed. Cost standards measure the resources required to produce goods or services, such as the materials costs of a manufactured product. Quality standards describe the level of quality needed to meet customer expectations such as the number of quality control inspections made. 23. Differentiate between preventive controls and screening controls. Preventive controls guide actions toward intended results, such as using a procedures manual. Screening controls identify points in a process at which corrective action can be taken before a process is completed in order to avoid defects or waste.
Chapter 7 Planning, Budgeting, and Controlling 7- 24. Contrast control as a “policing activity” and control as a “steering activity.” Answers might focus on preventive controls as steering activities and screening controls as policing activities. But in the sense of planning and budgeting, a budget can be seen as a means of helping to achieve a plan (steering or facilitating) rather than preventing or restraining actions. Top-management attitudes may affect which perceptions occur more than any other factor. LEARNING EXERCISES EXERCISE 1: EFFICIENCY AND EFFECTIVENESS INDICATORS Efficiency Effectiveness
- Sales department Number of customers visited per day/ sales associate Percentage of contracts signed by the number of customers contacted (%)
- Telephone- answering service Number of minutes per call Average waiting time before answering calls (in seconds)
- Purchasing department Cost per $100 of goods purchased Delay in processing an order (days)
- Politician Number of constituents visited during the campaign each day % of votes
- Rehabilitation centre Number of inmates per social worker % of recidivism
- Student Time spent to prepare for an exam (hours) Grade obtained (%)
- General insurance company Cost per premium ($) % of premiums to claims
- Cleaning department Cost per metre ($) Number of complaints
- Security department Cost per metre ($) Number of infractions
- School Teacher/student ratio Average grades % of students going to college or university
Chapter 7 Planning, Budgeting, and Controlling 7- EXERCISE 3: ZERO-BASED BUDGETING
- Sanitation department Number of times garbage is picked up each week
- Training department Number of courses given (intensity of programs: for managers, employees)
- Quality control Number of tests made to total production department
- Police department Cost of property crime/resident
- Advertising department Intensity of advertising and promotional programs
- Telephone-answering service Delay in answering calls; type of responses to clients
7-8 Chapter 7 Planning, Budgeting, and Controlling EXERCISE 4: CASH BUDGET Quantum Plastics Ltd’s cash budget for the months of January to April 2014.
7-10 Chapter 7 Planning, Budgeting, and Controlling EXERCISE 6: THE SUSTAINABLE GROWTH RATE AND THE Z-SCORE
- Eagle Electronics Inc.’s sustainable growth rate M Ratio of profit to revenue = 0. R Ratio of reinvested profit to = 0. profit before dividends D/E Ratio of total liabilities to equity = 1. A Ratio of assets to sales = 1. (M) (R) (1 + D/E) (0) × (0) × (1 + 1) Growth = ------------------------------------------------------ =. 1 - (0) × (0) × (1 + 1) (A) (M) (R) (1 + D/E)
Chapter 7 Planning, Budgeting, and Controlling 7- 2. Eagle Electronics Inc.'s Z-score Z = 1 (a) + 1 (b) + 3 (c) + 0 (d) + 1 (e) Z = 1 (0) + 1 (0) + 3 (0) + 0 (0) + 1 (1) = 2. Calculation:
Chapter 7 Planning, Budgeting, and Controlling SEABRIDGE DISTRIBUTORS LTD. - 2014 MONTHLY SALES BUDGET
7-14 Chapter 7 Planning, Budgeting, and Controlling SEABRIDGE DISTRIBUTORS LTD. - 2014 MONTHLY SALES BUDGET 2. Is there anything wrong with the way that the sales budget and sales objectives were
7-16 Chapter 7 Planning, Budgeting, and Controlling The following gives a detailed outline of the monthly budget for the months beginning July 1, 2013 to January 31, 2014 (assumes no sales in May or June because operations started in July). in dollars July August Septemb er October Novembe r Decembe r January Revenue 50,000 100,000 500,000 650,000 550,000 400,000 200, Collections Cash (10%) 5,000 10,000 50,000 65,000 55,000 40,000 20, 30-day payment (40%) 0 20,000 40,000 200,000 260,000 220,000 160, 60-day payment (50%) 0 0 25,000 50,000 250,000 325,000 275, Total receipts 5,000 30,000 115,000 315,000 565,000 585,000 455, Purchases 40,000 80,000 400,000 520,000 440,000 320,000 160, Payments Cash (30%) 12,000 24,000 120,000 156,000 132,000 96,000 48, 30-day payment (70%) 0 28,000 56,000 280,000 364,000 308,000 224, Total payments 12,000 52,000 176,000 436,000 496,000 404,000 272, Total receipts 5,000 30,000 115,000 315,000 565,000 585,000 455, Disbursements Purchases 12,000 52,000 176,000 436,000 496,000 404,000 272, Sales & administration 10,500 11,000 15,000 16,500 15,500 14,000 12, Start of operations 30,000 0 0 0 0 0 0 Total disbursements 52,500 63,000 191,000 452,500 511,500 418,000 284, Surplus/deficit (month) -47,500 -33,000 -76,000 -137,500 53,500 167,000 171, Cash start of month 75,000 27,500 -5,500 -81,500 -219,000 -165,500 1, Cumulative cash 27,500 -5,500 -81,500 -219,000 -165,500 1,500 172, Desired cash balance 25,000 25,000 25,000 25,000 25,000 25,000 25, Surplus(loan) 2,500 -30,500 -106,500 -244,000 -190,500 -23,500 147,
Chapter 7 Planning, Budgeting, and Controlling 7- CASE 3: UNITED MANUFACTURERS LTD. Encourage students to use the accompanying financial spreadsheets to analyze this case. With the financial objectives and assumptions presented below, prepare the following for the company: a) Projected statement of income for 2014 b) Projected statement of changes in equity for 2014 c) Projected statement of financial position for 2014 d) Projected statement of cash flows for 2014 e) Financial ratios for 2014, comparing them with the 2013 financial results Also, calculate the following: f) The company’s 2014 sustainable growth rate g) The company’s 2014 Z-score (Note: The financial spreadsheets accompanying this text were used for this case). a) United Manufacturers Ltd. – Statements of Income Statement of Income 2012 2013 2014 Revenue 2,900,000 3,100,000 3,410, Cost of sales Purchases 1,870,000 1,880,000 1,756, Freight in 0 0 0 Labour 0 0 0 Depreciation/amortization 0 0 0 Other charges 0 0 0 Total cost of sales 1,870,000 1,880,000 1,756, Gross profit 1,030,000 1,220,000 1,653, Other income 4,000 5,000 6, Distribution costs Salaries 325,000 330,000 358, Commissions 0 0 0 Travelling 0 0 0 Advertising 0 0 0 Depreciation/amortization 0 0 0 Other charges 0 0 0 Total selling expenses 325,000 330,000 358, Administrative expenses Salaries 220,000 210,000 194, Leasing 0 0 0 Depreciation/amortization 95,000 105,000 120, Research and development 35,000 45,000 68, Total administrative expenses 350,000 360,000 382,
Chapter 7 Planning, Budgeting, and Controlling Assets
- Revenue (previous year) 0 25,000 50, in dollars Oct. Nov. Dec.
- Purchases 12,500 25,
- Cash sales = 20% 0. Payment schedule
- 30-day payment = 60% 0.
- 60-day payment = 20% 0.
- Paid in 1st month = 00% 0. Purchase schedule
- Paid during 2nd month = 100% 1.
- Revenue 75,000 120,000 140,000 110, Jan. Feb. March April
- Cash sales = 20 % 15,000 24,000 28,000 22,
- 30-payment = 60 % 30,000 45,000 72,000 84,
- 60-day payment = 20% 5,000 10,000 15,000 24,
- Total monthly receipts 50,000 79,000 115,000 130,
- Purchases 37,500 60,000 70,000 55,
- Paid during 1st month = 0 %
- Paid during 2nd mo. = 100 % 25,000 37,500 60,000 70,
- Total monthly purchases 25,000 37,500 60,000 70,
- Receipts 50,000 79,000 115,000 130, - Purchases 25,000 37,500 60,000 70, Expenses - Salaries 22,000 22,000 22,000 22, - Telephone 1,000 1,000 1,000 1, - Rent 2,200 2,200 2,200 2, - Hydro 1,100 1,100 1,100 1, - Stationery - Taxes 0 3,000 - Equipment 24,000
- Total expenses 75,800 67,300 86,800 96,
- Surplus (-) /month (25,800) 11,700 28,200 33,
- Surplus(-) /cumulative (25,800) (14,100) 14,100 47,
- Beginning bank balance 12,000 (13,800) (2,100) 26, - Receipts 50,000 79,000 115,000 130, - Expenses 75,800 67,300 86,800 96,
- Ending bank balance (13,800) (2,100) 26,100 59,
- 7-
- Total market sales (2014) 15, Air Conditioners - Objectives (in units) 2, Market share objective (2014) 16% - Unit selling price $4, - Revenue objective $11,280,
- January % total In Units In Dollars
- February
- March 2 48 225,
- April 4 96 451,
- May 10 240 1,128,
- June 28 672 3,158,
- July 44 1,056 4,963,
- August 12 288 1,353,
- September
- October
- November
- December
- Total 100 2,400 11,280,
- Total market sales (2014) 2, Air Purifiers - Objectives (in units) Market share objective (2014) 15% - Unit selling price $ - Revenue objective $224,
- January 3 10 6, % total In Units In Dollars
- February 2 7 4,
- March 2 7 4,
- April 4 14 9,
- May 8 27 17,
- June 22 76 49,
- July 33 114 74,
- August 8 27 17,
- September 6 21 13,
- October 6 21 13,
- November 4 14 9,
- December 2 7 4,
- Total 100 345 224,
- Total market sales (2014) 83, Air Humidifiers
- Objectives (in units) 10, Market share objective (2014) 13%
- Unit selling price $
- Revenue objective $5,556,
- Objectives (in units) 10, Market share objective (2014) 13%
- Unit selling price $
- Total market sales (2014) 83, Air Humidifiers
- January 1 108 55, % total In Units In Dollars
- February 1 108 55,
- March
- April
- May
- June
- July
- August 6 647 333,
- September 12 1,295 666,
- October 38 4,100 2,111,
- November 28 3,021 1,555,
- December 14 1,511 778,
- Total 100 10,790 5,556,
- Total market sales (2014) 74, Air Dehumidifiers
- Objectives (in units) 8, Market share objective (2014) 11%
- Unit selling price $
- Revenue objective $3,663,
- Objectives (in units) 8, Market share objective (2014) 11%
- Unit selling price $
- Total market sales (2014) 74, Air Dehumidifiers
- January % total In Units In Dollars
- February
- March
- April
- May 5 407 183,
- June 33 2,686 1,208,
- July 56 4,559 2,051,
- August 6 488 219,
- September
- October
- November
- December
- Total 100 8,140 3,663,
- 7-
- Statement of Financial Position
- Capital assets 2,719,000 2,919,000 3,579, Non-current assets
- Goodwill
- Investments
- Other non-current assets 100,000 200,000 300,
- Sub-total 2,819,000 3,119,000 3,879,
- Accumulated depreciation/amortization 595,000 700,000 820,
- Total non-current assets 2,224,000 2,419,000 3,059,
- Inventories 256,000 268,000 357, Current assets
- Trade receivables 420,000 459,000 419,
- Prepaid expenses
- Cash and cash equivalents 48,000 54,000 68,
- Other current asset
- Other current asset
- Total current assets 724,000 781,000 844,
- Total assets 2,948,000 3,200,000 3,903,
- Share capital 800,000 800,000 1,000, Equity and liabilities
- Retained earnings 652,000 904,500 1,296,
- Other comprehensive income/(loss)
- Total equity 1,452,000 1,704,500 2,296,
- Total non-current liabilities 950,000 1,000,000 1,039,
- Trade and other payables 140,000 131,600 198, Current liabilities
- Short-term borrowings 256,000 263,900 268,
- Current portion of long-term debt
- Accruals
- Other current liabilities 150,000 100,000 100,
- Total current liabilities 546,000 495,500 567,
- Total liabilities 1,496,000 1,495,500 1,606,
- Total equity and liabilities 2,948,000 3,200,000 3,903,
7-20 Chapter 7 Planning, Budgeting, and Controlling d) United Manufacturers Ltd. – Statements of Cash Flows Statement of Cash Flows 2013 Total 2014 Total Operating activities Profit for the year 252,500 442, Depreciation/amortization 105,000 120, Inventories -12,000 -89, Trade receivables -39,000 39, Prepaid expenses 0 0 Other current asset 1 0 0 Other current asset 2 0 0 Trade and other payables -8,400 67, Short-term borrowings 7,900 4, Current portion of long-term debt 0 0 Accruals 0 0 Other current liabilities -50,000 0 Total operating activities 256,000 584, Financing activities Share capital 0 200, Other comprehensive income/(loss) 0 0 Total non-current liabilities 50,000 39, Dividends paid to shareholders 0 -50, Total financing activities 50,000 189, Investing activities Capital assets - 200,000 -660, Goodwill 0 0 Investments 0 0 Other non-current assets - 100,000 -100, Adjustments 0 0 Total investing activities -300,000 -760, Increase 6,000 6,000 14,200 14, Cash and equ. - Beginning of year 48,000 54, Cash and equ. - End of year 54,000 68,
Final Test Chapter 7 Finance
Course: Introduction to Finance (FIN2303)
University: Algonquin College
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