Question

Short Anwers: 1-3 Sentences

Discuss the 3 general approaches to forecasting. (Experience, Profitability and Correlation)

Talk about the distinction between a cash budget and capital budget. (hint; a cash budget talks about cash in/cash out while a capital budget focuses on major asset purchases. Know that IF you had a debt ratio running about 20%, what would be the best way to fund additional $$ ?   -----increase long term debt.

Answer 1

3 General approaches to forecasting are discussed below:

1.      Judgmental Approaches.

In a judgment-based technique we gather the knowledge and opinions people who are in a position to know what demand will be.

2.      Experimental Approaches.

This approach is used when an item is “new” and when there is no other information upon which to base a forecast, is to, conduct a demand experiment on a small group of customers and to extrapolate the results to a larger population.

3.      Relational/Causal Approaches.

The assumption behind a causal or relational forecast is that, simply put, there is a reason why people buy our product. If we can understand what that reason (or set of reasons) is, we can use that understanding to develop a demand forecast.

Distinction between Cash Budget and Capital Budget

1. Capital budget is prepared for the capital items , Income and expenditure on the capital assets . for example: plant & machinery , shares , furniture etc . it is for fixed assets , whereas, Cash budget is prepared for the revenue items, income and expenditure on the current assets . Asset which can be converted in cash in 1 year . For example: stock, bill receivable etc .

2. A capital budget is a tool used to plan major, long-term, cash-intensive projects like building new facilities, purchasing major equipment or funding long-term research. Unlike cash budgets, capital budgets are light on estimates and heavy on financial analysis.

Know that IF you had a debt ratio running about 20%, what would be the best way to fund additional $$ ?   -----increase long term debt.

If the debt ratio is greater than 1, the capital provided by lenders exceeds the capital provided by owners. Bank loan officers will generally consider a company with a high debt-to-worth ratio to be a greater risk. Here, the debt ratio is 20% i.e 0.2 which is less than 1, therefore, the additional fund could be raised either by debt or by equity.