Financial Planning & Analysis Flashcards

A business owner is choosing between leasing and buying equipment. Which financial concept is most relevant to this decision?

Answer: Net present value (NPV) comparison

Comparing the NPV of lease payments versus purchase costs (including tax benefits) reveals which option is less costly in today's dollars.

Which financial metric measures the return generated relative to the equity invested by shareholders?

Answer: Return on equity (ROE)

ROE = Net Income / Shareholders' Equity, showing how much profit is earned per dollar of equity.

A pro forma income statement is best described as:

Answer: A projected income statement based on assumptions about the future

Pro forma statements are forward-looking projections used in planning, fundraising, or evaluating strategic decisions.

Gross profit margin is calculated as:

Answer: (Revenue − COGS) / Revenue × 100

Gross profit margin = (Revenue − Cost of Goods Sold) / Revenue × 100, showing the percentage of revenue retained after direct production costs.

When a company's operating leverage is high, what is the implication?

Answer: A small change in revenue leads to a large change in operating profit

High operating leverage means fixed costs dominate; once they are covered, additional revenue flows almost entirely to profit, amplifying both gains and losses.

A financial plan projects $800,000 in revenue with a 25% net profit margin. If actual net profit is $170,000, what is the profit variance?

Answer: $30,000 unfavorable

Expected net profit = $800,000 × 25% = $200,000; actual = $170,000; variance = $30,000 unfavorable.

Which type of cost remains constant per unit but changes in total as production volume changes?

Answer: Variable cost

Variable costs are constant per unit but increase or decrease in total proportionally with production volume.