CA CA Budgeting & Forecasting 2 — Questions and Answers
Question 1: What is a 'rolling forecast'?
- A budget that carries unused funds forward to the following period
- A continuously updated forecast that adds new periods as previous ones expire (Correct answer)
- A forecast calculated as a rolling average of historical data
- A multi-year strategic plan reviewed on an annual basis
Correct answer: A continuously updated forecast that adds new periods as previous ones expire
A rolling forecast maintains a consistent planning horizon by appending new periods as each period expires, ensuring a continuous forward view is always available.
Question 2: Which forecasting method uses historical data patterns, trends, and seasonality to project future values?
- Qualitative forecasting
- Time series analysis (Correct answer)
- Market research surveys
- The Delphi method
Correct answer: Time series analysis
Time series analysis is a quantitative forecasting technique that uses historical data patterns, including trends and seasonal cycles, to project future values.
Question 3: What is a 'flexible budget'?
- A budget that management can revise without formal approval
- A budget that adjusts projected costs and revenues based on actual activity levels (Correct answer)
- A budget with built-in contingency reserves for unexpected expenses
- A budget prepared on a monthly rather than annual cycle
Correct answer: A budget that adjusts projected costs and revenues based on actual activity levels
A flexible budget adjusts total budgeted costs to reflect the actual volume of activity achieved, enabling a more meaningful performance comparison than a static budget.
Question 4: In budgeting, what does 'sensitivity analysis' examine?
- The emotional impact of budget reductions on employee morale
- How changes in key assumptions affect projected financial outcomes (Correct answer)
- The sensitivity of customers to proposed price increases
- The reliability of accounting estimates used in financial reporting
Correct answer: How changes in key assumptions affect projected financial outcomes
Sensitivity analysis tests how financial projections change when key assumptions such as sales volume, pricing, or costs are varied from their base-case estimates.
Question 5: What is 'capital budgeting'?
- The process of budgeting employee compensation and benefit costs
- The process of evaluating and selecting long-term investment projects (Correct answer)
- Preparing the federal government's annual capital spending plan
- Planning working capital requirements for the operating cycle
Correct answer: The process of evaluating and selecting long-term investment projects
Capital budgeting is the process of analyzing and deciding which long-term investments — such as equipment, facilities, or acquisitions — are worth undertaking.
Question 6: The 'Delphi method' of forecasting works by:
- Fitting historical data to a trend line equation
- Iteratively gathering and refining opinions from a panel of experts (Correct answer)
- Applying regression analysis to publicly available industry data
- Simulating thousands of outcomes using Monte Carlo computer models
Correct answer: Iteratively gathering and refining opinions from a panel of experts
The Delphi method is a structured forecasting technique that uses multiple rounds of anonymous expert questionnaires, with feedback between rounds, to converge on a consensus estimate.
CA CA Budgeting & Forecasting 2
What is a 'rolling forecast'?