Intermediate Financial Management11th Edition by Eugene F. Brigham – Test Bank

Intermediate Financial Management11th Edition by Eugene F. Brigham – Test Bank

Chapter 09

Multiple Choice: True/False

(9.1) Mission statement F K Answer: a EASY
. The mission statement is a statement of the firm’s overall purpose.

a. True
b. False

(9.1) Corporate strategies F K Answer: b EASY
. Once a firm has defined its purpose, scope, and objectives, it must develop a strategy for achieving its goals. Corporate strategies are detailed plans rather than broad approaches.

a. True
b. False

(9.2) Sales forecast F K Answer: a EASY
. The first, and most critical, step in constructing a set of forecasted financial statements is the sales forecast.

a. True
b. False

(9.2) Sales forecast F K Answer: a EASY
. A typical sales forecast, though concerned with future events, will usually be based on recent historical trends and events as well as on forecasts of economic prospects.

a. True
b. False

(9.2) Sales forecast F K Answer: b EASY
. Errors in the sales forecast can be offset by similar errors in costs and income forecasts. Thus, as long as the errors are not large, sales forecast accuracy is not critical to the well being of the firm.

a. True
b. False

(9.3) Spontaneous liabilities F K Answer: a EASY
. As a firm’s sales grow, its current assets also tend to increase. For instance, as sales increase, the firm’s inventories generally increase, and purchases of inventories result in more accounts payable. Thus, spontaneous liabilities that reduce AFN arise from transactions brought on by sales increases.

a. True
b. False

(9.3) Spontaneous liabilities F K Answer: b EASY
. Firms pay a low interest rate on spontaneous liabilities so these funds are its cheapest source of capital. Consequently, the firm should make arrangements with its suppliers to use as much of this credit as possible.

a. True
b. False

(9.3) Spontaneous liabilities F K Answer: a EASY
. A firm will use spontaneous funds to the extent possible; however, due to credit terms, contracts with workers, and tax laws there is little flexibility in their usage.

a. True
b. False

(9.3) Addition to ret. earnings F K Answer: a EASY
. As long as a firm does not pay out 100% of its earnings, the firm’s annual profit that is retained in the business (i.e., the addition to retained earnings) is another source of funds for a firm’s expansion.

a. True
b. False

(9.3) Asset increase F K Answer: a EASY
. A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset.

a. True
b. False