Financial Forecasting and Decision Making

SOLUTIONS

CHAPTER 1

Solutions to Knowledge Check Questions

1.    

a.     Incorrect. We generally estimate sales for the forecast year and use this estimate as the starting point for the forecast.

b.     Correct. Most forecasting models are “sales driven.”

c.     Incorrect. We start with a sales forecast and use this to determine the amount of cash needed.

d.     Incorrect. We start with a sales forecast and estimate current assets needed.

2.    

a.     Incorrect. The first-pass forecast is used as the base forecast making the assumption that conditions will be similar to the past year. We do not use it for planning per se.

b.     Correct. Based on the first-pass forecast, we answer the question “what if…” by running simulations. This is done in the second-pass forecast.

c.     Incorrect. Simulation is part of the forecasting process and generally leads to a second-pass forecast.

d.     Incorrect. This is done in the forecasting process beginning with the second pass.

3.    

a.     This is a true statement. Before we can plan for a company's future, we need to define what its overall purpose is.

b.     This is a true statement. Before we can plan for a company's future, we need to know what its overall purpose is. This allows you to aim the company in the correct direction.

c.     Correct. Both of the statements above are true; so this statement is the truest. Defining the purpose, scope, and objectives are the prerequisites for forecasting.

d.     Incorrect. Since both answers ...