AP AP Financial Management & Budgeting 1 — Questions and Answers
Question 1: Which budgeting approach requires each department to justify all expenditures from scratch each period?
- Incremental budgeting
- Zero-based budgeting (Correct answer)
- Rolling budget
- Activity-based budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting requires every expense to be re-justified for each new period, starting from zero.
Question 2: What is the primary purpose of a cash flow forecast in AP financial management?
- To calculate net profit margins
- To predict future cash availability and potential shortfalls (Correct answer)
- To determine employee bonuses
- To assess inventory turnover rates
Correct answer: To predict future cash availability and potential shortfalls
A cash flow forecast helps organizations anticipate future cash needs and identify potential funding gaps before they occur.
Question 3: A variance report shows actual spending is $15,000 over a $50,000 budget. What is the variance percentage?
- 25%
- 15%
- 30% (Correct answer)
- 33%
Correct answer: 30%
Variance percentage is calculated as (variance / budgeted amount) × 100 = (15,000 / 50,000) × 100 = 30%.
Question 4: Which financial ratio measures a company's ability to pay short-term obligations using its most liquid assets?
- Debt-to-equity ratio
- Quick ratio (Correct answer)
- Return on equity
- Gross profit margin
Correct answer: Quick ratio
The quick ratio (acid-test ratio) measures ability to meet short-term liabilities using assets that can be quickly converted to cash.
Question 5: In AP financial planning, what does the term 'encumbrance' refer to?
- A long-term debt obligation
- Funds reserved for a committed but not yet paid expense (Correct answer)
- A type of revenue recognition
- An asset depreciation method
Correct answer: Funds reserved for a committed but not yet paid expense
An encumbrance is a reservation of budget funds for a purchase order or contract that has been committed but not yet invoiced or paid.
Question 6: Which type of cost remains constant regardless of production volume within a relevant range?
- Variable cost
- Semi-variable cost
- Fixed cost (Correct answer)
- Marginal cost
Correct answer: Fixed cost
Fixed costs, such as rent or salaries, do not change with changes in production or service volume within a defined relevant range.
AP AP Financial Management & Budgeting 1
Which budgeting approach requires each department to justify all expenditures from scratch each period?