CBO Financial Planning & Analysis 3 — Questions and Answers
Question 1: Which ratio measures how efficiently a company uses its assets to generate revenue?
- Current ratio
- Debt-to-equity ratio
- Asset turnover ratio (Correct answer)
- Gross margin ratio
Correct answer: Asset turnover ratio
Asset turnover ratio = Net Sales / Average Total Assets, measuring how effectively assets generate revenue.
Question 2: A company uses FIFO inventory accounting. During a period of rising prices, what effect does this have on net income compared to LIFO?
- Lower net income
- Higher net income (Correct answer)
- No difference in net income
- Net income becomes negative
Correct answer: Higher net income
FIFO assigns older, lower-cost inventory to COGS first, resulting in lower COGS and higher net income when prices are rising.
Question 3: What is the purpose of a sensitivity analysis in financial planning?
- To determine the exact future cash flows
- To test how outcomes change when key assumptions vary (Correct answer)
- To calculate the weighted average cost of capital
- To prepare the annual tax return
Correct answer: To test how outcomes change when key assumptions vary
Sensitivity analysis examines how changes in one or more input variables affect a financial outcome, revealing which assumptions matter most.
Question 4: An operator calculates EBITDA at $120,000 and interest expense at $20,000, depreciation at $15,000, and taxes at $10,000. What is net income?
- $75,000 (Correct answer)
- $85,000
- $95,000
- $105,000
Correct answer: $75,000
Net income = EBITDA − Depreciation − Interest − Taxes = $120,000 − $15,000 − $20,000 − $10,000 = $75,000.
Question 5: Which of the following best describes the concept of working capital?
- Total assets minus total liabilities
- Current assets minus current liabilities (Correct answer)
- Revenue minus operating expenses
- Long-term debt minus equity
Correct answer: Current assets minus current liabilities
Working capital = Current Assets − Current Liabilities, representing the funds available for day-to-day operations.
Question 6: A business wants to reduce its cash conversion cycle. Which action would be most effective?
- Extending the time to pay suppliers (Correct answer)
- Increasing inventory levels
- Slowing collection of receivables
- Reducing revenue
Correct answer: Extending the time to pay suppliers
Extending days payable outstanding (paying suppliers later) lengthens the float and reduces the cash conversion cycle.
Question 7: What does a high debt-service coverage ratio (DSCR) indicate?
- The company struggles to pay its debt obligations
- The company has strong cash flow relative to its debt payments (Correct answer)
- The company has excessive equity
- The company's revenue is declining
Correct answer: The company has strong cash flow relative to its debt payments
A high DSCR (typically above 1.25) means the business generates sufficient cash flow to comfortably cover loan payments.
CBO Financial Planning & Analysis 3
Which ratio measures how efficiently a company uses its assets to generate revenue?