MU-MAIN CAMPUS CPA (T) REVIEWS

Topic Eight: FINANCIAL PLANNING AND FORECASTING.

Question 1: NBAA May 2022

(a) Financial forecasting is defined as a systematic process of analyzing the economic, social and
financial influences affecting a business with an objective of predicting the business’s total needs
of funds for the future based on past and present information.
Required:
Explain why you think most financial planning process begins with sales forecasts. (5 marks)

(b) The Manager of Pangani Co. Ltd believes that knowing forecasting financial requirements in
advance of needs assists a firm manager to perform his responsibilities more effectively. His
company expects sales during 2023 to rise from the 2022 level of TZS.3.5 million to TZS.3.9
million. Because of the scheduled large payment, the interest expense in 2023 is expected to drop
to TZS. 325,000. The firm plans to increase its cash dividend payment during 2023 to
TZS.320,000. He has presented you with the following Income Statement:
Income Statement for the year ended April 30th 2022
TZS.”000”
Sales Revenue 3,500,000
Less: Cost of Goods sold 1,925,000
Gross Profit 1,575,000
Less: Operating expenses 420,000
Operating Profit 1,155,000
Less: Interest expenses 400,000
Net profits before taxes 755,000
Less: Taxes (rate 40%) 302,000
Net Profits after taxes 453,000
Less: Cash Dividends 250,000
To Retained Earnings 203,000

Required:
(i) Use the percent of sales method to prepare a 2023 proforma income statement for Pangani Co.
Ltd. (8 marks)

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(ii) Explain why the statement may underestimate Pangani’s actual 2023 proforma invoice.
(2 marks)

Question 2: NBAA February 2022

(a) Financial forecasting is defined as a systematic process of analyzing the economic social and
financial influences affecting a business with the object of predicting a business’s total needs of
funds for the future based on past and present information.
Required:
Explain why you think most financial planning begins with sales forecasts. (4 marks)

(b) TRIPLE D Enterprise is planning to raise external funds to finance an increase in assets needed
to produce extra 10,000 sales units. The firm is operating at full capacity. The finance director has
provided the following key financial indicators of the company:
Selected Financial Indicators: 31st December 2021
Current Sales Level (The year 2021) TZS.15 million
Projected increase in sales (The year 2022) TZS.3 million
Total assets TZS.9 million
Fixed Assets TZS.3 million
Inventory TZS.2 million
Accounts Receivable TZS.3 million
Accounts Payable TZS.3.75 million
Accrued Expenses TZS.0.75 million
Net Profit Margin 3%
Dividend Payout Ratio 50%

Historical values of sales, inventory and external financing requirements over the past five years
are as shown below: (Millions of TZS.)
Year Inventory Sales External Financing Requirement
2017 1.4 9 6
2018 1.5 10 7
2019 1.6 11 8

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2020 1.8 13 10
2021 2.0 15 13

Required:
(i) Using the percent of Sales Method forecast the values of the following financial indicators for
the year 2022:
i • Total Assets
ii • Fixed Assets
iii • Accounts Receivable
iv • Accounts Payable
v • Additional Funds Needed (4 marks)
(ii) Using Regression Analysis, predict the external financing requirements for the TRIPLE D
Enterprise in the year 2025. (3 marks)
(iii) Using Regression Analysis predict the inventory values for the TRIPLE D Enterprise in the
year 2025 if the projected sales level in that year is TZS.23 million. (3 marks)

Question 3: NBAA November 2021

Apesa Company achieved a turnover of TZS.16 million in the year that has just ended and expects
turnover growth of 8.4% for the next year. Cost of sales in the year that has just ended was TZS
10.88 million and other expenses were TZS 1.44 million. The financial statements of APESA Co.
for the year that has just ended is as follows:
Given below is the Statement of Financial Position of Apesa Company as at 31st March 2021:
Apesa Company Statement of Financial Position as at 31st March 2021

TZS. million TZS. million

Non-current assets 22.0
Current assets
Inventory 2.2
Trade receivables 2.4 4.6
Total assets 26.6
Equity finance
Ordinary shares 5.0
Reserves 7.5 12.5

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Long-term bank loan 10.0

22.5
Current liabilities
Trade payable 1.9
Overdraft 2.2 4.1
Total equity and liabilities 26.6
The long-term bank loan has a fixed annual interest rate of 8% per year. Apesa Co. pays taxation
at a rate of 30% per year.
The following accounting ratios have been forecasted for the next year:
Gross profit margin: 30%
Operating profit margin: 20%
Dividend payout ratio: 50%
Inventory turnover period: 110 days
Trade receivables period 65 days
Trade payables period 75 days
Overdraft interest in the next year is forecasted to be TZS.140,000. No change is expected in the
level of non-current assets and depreciation should be ignored.
Required:
Prepare the following forecast Financial Statements for Apesa Co. using the information provided:
(i) A Statement of Profit or Loss for the next year. (5 marks)
(ii) A Statement of Financial Position at the end of the next year. (5 marks)

Question 4: NBAA May 2021

Sungura Company is attempting to establish a current asset policy. Three alternative current asset
policies are under consideration:
1. Alternative 1: Current Assets Level: 40% of Projected Sales
2. Alternative II: Current Assets Level: 50% of Projected Sales
3. Alternative III: Current Assets Level: 60% of Projected Sales
Non-current assets are TZS.36 million and the firm plans to maintain a 50% debt-to-asset ratio.
The interest rate is 10% on all debt. The company expects to earn 15% before interest and taxes

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on sales of TZS.180 million. The corporate tax rate applicable to Sungura Company is 40%.
Assume that Sungura Company’s objective is to maximize the expected Return on Equity.
Required:
(i) Prepare projected Statement of Financial Position and income statement under each alternative
current asset policy and calculate the Return on Equity. (6 marks)
(ii) Advise Sungura Company on the best current asset policy to adopt. (2 marks)

Question 5: NBAA November 2019

MOMBO is famous merchandizing firm in Arusha. The firm is planning to expand its operation
by 50% for the next financial year. Its current sales level is TZS30 million and the projected sales,
for the next year is TZS45 million the firm’s current statement of financial position is as shown
below:
MOMBO Company Statement of Financial Position as at 31st December 2018
ASSETS TZS TZS
Fixed assets 9,000,000
Current assets:
Inventories 6,000,000
Receivables 5,100,000
Cash 600,000
Total current assets 11,700,000
Total Assets 20,700,000
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable 2,400,000
Notes payable 600,000
Accrued wages 1,500,000
Total Current Liabilities 4,500,000
Mortgage bonds 4,320,000
Common stocks 9,000,000
Retained earnings 2,880,000

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Total Liabilities and Equity 20,700,000

The firm is operating at full capacity. In 2018, the firm recorded a net income of TZS1,200,000
out of which a dividend of TZS480,000 was paid to the firm’s owners. The dividend payout is not
expected to change in the foreseeable future.
Required:
(i) Project the additional funds needed for the firm to operate at the planned sales level. (5 marks)
(ii) Prepare the projected statement of financial position as at 31st December 2019. Additional
funds needed are to be raised as follows:
Notes payable: 50%
Common stock: 50% (5 marks)

Question 6: NBAA May 2019

Ms. Witness, the Chief Financial Officer of FCM Company Ltd has created the firm’s pro forma
Statement of Financial Position for the next fiscal year. Sales are projected to grow at 10 percent
annually to the level of TZS.330 million in the next year. Current assets, non-current assets and
short-term debt are 125 percent, 150 percent and 35 percent of the total sales, respectively. FCM
Company Ltd profit margin on sales is 12 percent and it pays out 40 percent of net income as
dividend. Currently the company operates at 90 percent of the non-current assets.
Required:
(i) Estimate the amount of funds that the company is required to raise from external sources to
support the sales growth. (2 marks)
(ii) The firm is thinking of changing the dividend payout ratio to 30 percent to increase its plough
back. Determine the external fund that will be needed under the new policy. Explain your answer.
(2 marks)
(iii) With the new sales level, will the firm be operating at fully capacity? Explain. (2 marks)
(iv) Determine the amount of assets of the company at this new sales level. (2 marks)
(v) Determine the external financing that will be required for the sales growth in the second year.
(2 marks)

Mtukwao Corporation is in the process of making financial forecasting. As a Consultant you are
provided with the statement of financial position below:

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Forecast for 2018 Forecast for 2019

TZS. TZS. TZS. TZS.
Non-current assets 100,000 120,000
Less: Depreciation 40,000 60,000 52,000 68,000
Current Assets:
Stocks 10,000 12,000
Debtors 12,000 13,000
Cash 3,000 -
25,000 25,000
Less: Current Liabilities:
Creditors 8,000 9,000
(Bank overdraft) - 10,000
8,000 17,000 19,000 6,000
77,000 74,000
Ordinary share capital 60,000 60,000
Retained earnings 17,000 14,000
77,000 74,000

Required:
Prepare cash forecast from the above given information, clearly showing the net change in liquidity
between the two years. Further, show the breakdown of change in working capital for each of its
components that is debtors; inventory and creditors. (10 marks)

Question 7: NBAA November 2018

XYZ Ltd has projected sales of TZS.80,000,000 in the next financial year, and the Chief Executive
Officer of the company has asked you to examine how such sales projection will be financed. You
have gathered the following information relating to the ending year (2017) and forecasted year
(2018) as follows:
Sales in 2017 TZS.60,000,000
Projected sales in 2018 TZS.80,000,000
Net profit margin 5%

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Dividend payout ratio 40%

Closing balance in retained earnings TZS.20,000,000
Ratio of cash to sales 4%
Ratio of account receivable to sales 10%
Ratio of inventory to sales 30%
Projected non-current assets TZS.30,000,000
Ratio of account payable to sales 7%
Ratio of accrued liability to sales 15%
Common stock TZS.22,000,000

The director of the company wishes to finance all the required funds without affecting the common
stock level. Hence, all the financing should come from retained earnings and external financing.
Required:
(i) Prepare the proforma Statement of Financial Position for the year 2018 to be presented to the
Board of Directors. (8 marks)
(ii) Recast the proforma Statement of Financial Position prepared in (i) above assuming XYZ Ltd
wishes to finance the additional funds needed with both new issue of shares and bank debt while
maintaining a total debt-to-asset ratio of 45%. (6 marks)

Question 8: NBAA May 2016

Carter Corporation’s sales are expected to increase from TZS.50 million in 2015 to TZS.60 million
in 2016. Its assets totalled TZS.30 million at the end of 2015. Carter is operating at full capacity,
so its assets must grow in proportion to projected sales. At the end of 2015, current liabilities were
TZS.10 million, consisting of TZS.2,500,000 of accounts payable, TZS.5,000,000 of notes
payable, and TZS.2,500,000 of accrued liabilities. The after-tax profit margin is forecasted to be
5%, and the forecasted earnings retention ratio is 30 percent.
Required:
(i) Calculate Carter’s additional funds needed for the year 2016 (4 marks)
(ii) Calculate the value of assets for the year 2016. (1 mark)
(iii) If the additional funds are to be raised through notes payable, what would be the amount of
notes payable at the end of year 2016? (3 marks)

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Question 9: NBAA November 2015

APEX Co. achieved a turnover of TZS.16 million in the year that has just ended and expects
turnover growth of 8.4% for the next year. Cost of sales in the year that has just ended was TZS
10.88 million and other expenses were TZS 1.44 million. The financial statements of APEX Co.
for the year that has just ended is as follows:
Statement of financial position
AMOUNT (TZS Millions)
Assets
Non-Current Assets 22.0
Current Assets
Inventory 2.4
Trade Receivables 2.2
Total Assets 26.6
Equity and Liabilities
Equity Finance
Ordinary Shares 5.0
Reserves 7.5
Long Term Bank Loan 10.0
Trade Payable 1.9
Overdraft 2.2
Total Equity and Liabilities 26.6

The long-term bank loan has a fixed annual interest rate of 8% per year. APEX Co. pays taxation
at an annual rate of 40% per year. The following accounting ratios have been forecasted for the
next three years:
Gross profit margin: 30%
Operating profit margin: 20%
Dividend payout 50%
Inventory turnover 110 days
Trade receivable period: 65 days
Trade payable period: 75 days

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Overdraft interest in the next year is forecasted to be TZS 140,000. No change is expected in the
level of non-current assets and depreciation should be ignored.
Required:
Prepare the following forecasted financial statements for APEX Co.:
(i) A Statement of Income for the next year. (7 marks)
(ii) A Statement of Financial Position at the end of the next year. (7 marks)

“Believe you can and you are halfway there”.

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