CCM Financial Management & Budgeting 2 — Questions and Answers
Question 1: A company's days sales outstanding (DSO) increased from 35 to 52 days. What is the most likely financial impact?
- Improved cash conversion cycle
- Increased working capital requirements (Correct answer)
- Reduced accounts receivable balance
- Lower bad debt expense
Correct answer: Increased working capital requirements
A rising DSO means cash is tied up longer in receivables, increasing the amount of working capital the company must fund.
Question 2: Which budgeting method sets all budget line items to zero and requires justification for every dollar requested?
- Incremental budgeting
- Rolling budget
- Zero-based budgeting (Correct answer)
- Activity-based budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting starts from zero each period and requires managers to justify every expenditure rather than adjusting prior-year figures.
Question 3: A credit manager is evaluating a customer with a current ratio of 0.8. What does this indicate?
- The company has more current assets than current liabilities
- The company may struggle to meet short-term obligations (Correct answer)
- The company has strong liquidity reserves
- The company's long-term debt is excessive
Correct answer: The company may struggle to meet short-term obligations
A current ratio below 1.0 means current liabilities exceed current assets, signaling potential difficulty meeting short-term obligations.
Question 4: Under a flexible budget, what happens to the budgeted fixed costs when actual production volume exceeds the planned level?
- They increase proportionally with volume
- They decrease proportionally with volume
- They remain unchanged (Correct answer)
- They are eliminated from the budget
Correct answer: They remain unchanged
Fixed costs by definition do not change with production volume, so they remain constant in a flexible budget regardless of actual output.
Question 5: A company's EBITDA is $5 million and its total debt is $20 million. What is the debt-to-EBITDA ratio?
- 0.25
- 2.5
- 4.0 (Correct answer)
- 25.0
Correct answer: 4.0
Debt-to-EBITDA = $20M ÷ $5M = 4.0, indicating the company would need 4 years of EBITDA to repay its debt.
Question 6: 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 produced, so the total variable cost rises or falls directly with changes in production volume.
Question 7: A credit department is preparing a cash budget for Q3. Which item should NOT be included in the cash receipts section?
- Collections from accounts receivable
- Proceeds from asset sales
- Accrued interest income not yet received (Correct answer)
- Cash sales revenue
Correct answer: Accrued interest income not yet received
A cash budget records only actual cash flows; accrued income that has not yet been received in cash is excluded.
CCM Financial Management & Budgeting 2
A company's days sales outstanding (DSO) increased from 35 to 52 days.
What is the most likely financial impact?