CBO Financial Planning & Analysis 5 — Questions and Answers
Question 1: A rolling forecast differs from a static annual budget primarily because it:
- Is prepared only once per year
- Extends continuously as each period passes, always covering a fixed horizon (Correct answer)
- Is based on historical averages only
- Focuses exclusively on capital expenditures
Correct answer: Extends continuously as each period passes, always covering a fixed horizon
A rolling forecast is updated regularly (e.g., monthly), always projecting the same number of months ahead, keeping the plan current.
Question 2: What is the primary purpose of a cash flow forecast for a small business operator?
- To calculate tax liability
- To anticipate periods of cash surplus or shortage and plan accordingly (Correct answer)
- To determine the market value of the business
- To set employee compensation levels
Correct answer: To anticipate periods of cash surplus or shortage and plan accordingly
A cash flow forecast helps operators identify potential shortfalls in advance so they can arrange financing or adjust spending before a crisis occurs.
Question 3: Which of the following is an example of a capital expenditure (CapEx)?
- Monthly rent payment
- Purchase of a delivery truck (Correct answer)
- Payroll for the week
- Utility bills
Correct answer: Purchase of a delivery truck
Purchasing a delivery truck is a capital expenditure because it is a long-term asset that provides value over multiple periods.
Question 4: A company's quick ratio is 0.8. What does this suggest?
- The company can easily cover current liabilities with liquid assets
- The company may struggle to meet short-term obligations without selling inventory (Correct answer)
- The company has too much cash on hand
- The company's long-term debt is too high
Correct answer: The company may struggle to meet short-term obligations without selling inventory
A quick ratio below 1.0 means liquid assets (cash + receivables) are insufficient to cover current liabilities without liquidating inventory.
Question 5: What does the term 'burn rate' refer to in financial planning?
- The rate at which inventory is sold
- The speed at which a company spends its cash reserves (Correct answer)
- The percentage of revenue lost to refunds
- The rate of depreciation on fixed assets
Correct answer: The speed at which a company spends its cash reserves
Burn rate measures how quickly a company uses up its cash reserves, critical for startups and businesses in a cash-negative phase.
Question 6: In a scenario where a business is considering dropping an unprofitable product line, which cost type should be ignored in the decision?
- Variable costs
- Avoidable fixed costs
- Sunk costs (Correct answer)
- Direct material costs
Correct answer: Sunk costs
Sunk costs are past expenditures that cannot be recovered and are irrelevant to future decisions.
Question 7: A company's interest coverage ratio is 1.5. What does this indicate?
- The company earns 1.5 times its interest expense in operating income, a thin margin (Correct answer)
- The company is debt-free
- The company has a very comfortable ability to service debt
- The company's revenue exceeds liabilities by 50%
Correct answer: The company earns 1.5 times its interest expense in operating income, a thin margin
An interest coverage ratio of 1.5 means operating income is only 50% above interest obligations, which lenders typically consider a risky margin.
CBO Financial Planning & Analysis 5
A rolling forecast differs from a static annual budget primarily because it: