CBO Financial Planning & Analysis 2 — Questions and Answers
Question 1: A company's contribution margin ratio is 40% and fixed costs are $200,000. What is the break-even point in sales dollars?
- $300,000
- $400,000
- $500,000 (Correct answer)
- $800,000
Correct answer: $500,000
Break-even sales = Fixed Costs / Contribution Margin Ratio = $200,000 / 0.40 = $500,000.
Question 2: Which financial statement best shows a company's ability to meet short-term obligations?
- Income statement
- Balance sheet (Correct answer)
- Statement of cash flows
- Statement of retained earnings
Correct answer: Balance sheet
The balance sheet shows current assets versus current liabilities, directly revealing short-term liquidity.
Question 3: A business is evaluating a project with an initial investment of $50,000 that generates $15,000 annually. What is the payback period?
- 2.5 years
- 3.0 years
- 3.33 years (Correct answer)
- 4.0 years
Correct answer: 3.33 years
Payback period = $50,000 / $15,000 per year = 3.33 years.
Question 4: What does a negative free cash flow most likely indicate?
- The company is highly profitable
- The company is investing heavily or burning cash (Correct answer)
- The company has low debt
- The company has strong operating margins
Correct answer: The company is investing heavily or burning cash
Negative free cash flow often means the company is spending more on capital expenditures or operations than it generates, common in growth phases.
Question 5: Which budgeting approach starts from zero each period and requires justification for every expense?
- Incremental budgeting
- Rolling budget
- Zero-based budgeting (Correct answer)
- Activity-based budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting (ZBB) builds the budget from scratch each period, requiring justification for all expenditures.
Question 6: If a company's days sales outstanding (DSO) increases significantly, what is the most likely concern?
- Inventory is accumulating
- Customers are paying more slowly (Correct answer)
- Operating costs are rising
- Profit margins are shrinking
Correct answer: Customers are paying more slowly
Rising DSO means it takes longer to collect receivables, which can strain cash flow and signal collection problems.
Question 7: A variance analysis shows actual costs are higher than budgeted costs. This is called a:
- Favorable variance
- Unfavorable variance (Correct answer)
- Neutral variance
- Zero variance
Correct answer: Unfavorable variance
When actual costs exceed budgeted costs, the variance is unfavorable because it negatively impacts profit.
CBO Financial Planning & Analysis 2
A company's contribution margin ratio is 40% and fixed costs are $200,000.
What is the break-even point in sales dollars?