AP AP Financial Management & Budgeting 2 — Questions and Answers
Question 1: What does GAAP stand for in the context of US financial reporting?
- General Accounting and Audit Principles
- Generally Accepted Accounting Principles (Correct answer)
- Government Approved Accounting Practices
- Global Accounting and Assessment Policies
Correct answer: Generally Accepted Accounting Principles
GAAP stands for Generally Accepted Accounting Principles, the standard framework for financial accounting in the United States.
Question 2: A department's budget is $120,000 for the year. By the end of Q2, $75,000 has been spent. Is the department on track?
- Yes, because $75,000 is less than $120,000
- No, because $75,000 exceeds the 50% midyear benchmark of $60,000 (Correct answer)
- Yes, because budget absorption over 50% is acceptable
- No, because the department should have spent less than $50,000
Correct answer: No, because $75,000 exceeds the 50% midyear benchmark of $60,000
At the midpoint of the year (Q2), the expected spend is 50% of $120,000 = $60,000; spending $75,000 means the department is 25% over pace.
Question 3: Which accounting principle states that revenue should be recorded when earned, not when cash is received?
- Matching principle
- Accrual principle (Correct answer)
- Conservatism principle
- Cost principle
Correct answer: Accrual principle
The accrual principle requires that revenue is recognized when it is earned regardless of when the actual cash payment is received.
Question 4: In a capital budget, what is the payback period?
- The time it takes to repay a bank loan
- The time required for an investment to generate returns equal to its initial cost (Correct answer)
- The period over which an asset is depreciated
- The fiscal year in which a major purchase is planned
Correct answer: The time required for an investment to generate returns equal to its initial cost
The payback period measures how long it takes for a capital investment to recover its initial cost through generated cash flows.
Question 5: What is the purpose of a rolling forecast in financial management?
- To lock in the annual budget without changes
- To provide a continuously updated financial outlook by adding future periods as past periods close (Correct answer)
- To calculate employee performance bonuses
- To document past expenditures for auditors
Correct answer: To provide a continuously updated financial outlook by adding future periods as past periods close
A rolling forecast is updated regularly to always look a fixed number of periods ahead, providing a more current view than a static annual budget.
Question 6: Which financial statement summarizes a company's revenues and expenses over a specific period?
- Balance sheet
- Cash flow statement
- Income statement (Correct answer)
- Statement of retained earnings
Correct answer: Income statement
The income statement (also called the profit and loss statement) shows revenues, costs, and expenses to reveal net profit or loss for a period.
AP AP Financial Management & Budgeting 2
What does GAAP stand for in the context of US financial reporting?