CBO Financial Planning & Analysis 4 — Questions and Answers
Question 1: A business owner is choosing between leasing and buying equipment. Which financial concept is most relevant to this decision?
- Gross margin analysis
- Net present value (NPV) comparison (Correct answer)
- Days inventory outstanding
- Revenue recognition policy
Correct 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.
Question 2: Which financial metric measures the return generated relative to the equity invested by shareholders?
- Return on assets (ROA)
- Return on equity (ROE) (Correct answer)
- Gross profit margin
- Operating leverage ratio
Correct answer: Return on equity (ROE)
ROE = Net Income / Shareholders' Equity, showing how much profit is earned per dollar of equity.
Question 3: A pro forma income statement is best described as:
- A historical record of past earnings
- A projected income statement based on assumptions about the future (Correct answer)
- A statement required by GAAP for public filings
- A summary of cash inflows and outflows
Correct 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.
Question 4: Gross profit margin is calculated as:
- (Net Income / Revenue) × 100
- (Revenue − COGS) / Revenue × 100 (Correct answer)
- (Operating Income / Total Assets) × 100
- (Net Income / Total Equity) × 100
Correct 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.
Question 5: When a company's operating leverage is high, what is the implication?
- A small change in revenue leads to a large change in operating profit (Correct answer)
- The company has more variable costs than fixed costs
- The company's debt levels are elevated
- Cash flow is consistently stable
Correct 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.
Question 6: 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?
- $15,000 unfavorable
- $30,000 unfavorable (Correct answer)
- $30,000 favorable
- $15,000 favorable
Correct answer: $30,000 unfavorable
Expected net profit = $800,000 × 25% = $200,000; actual = $170,000; variance = $30,000 unfavorable.
Question 7: Which type of cost remains constant per unit but changes in total as production volume changes?
- Fixed cost
- Variable cost (Correct answer)
- Semi-variable cost
- Sunk cost
Correct answer: Variable cost
Variable costs are constant per unit but increase or decrease in total proportionally with production volume.
CBO Financial Planning & Analysis 4
A business owner is choosing between leasing and buying equipment.
Which financial concept is most relevant to this decision?