CCM Financial Management & Budgeting 3

Question 1

What does the operating leverage ratio measure?

Accepted Answer

The sensitivity of operating income to changes in sales volume

Answer

Operating leverage measures how a percentage change in sales translates into a percentage change in operating income, driven by the mix of fixed versus variable costs.

Question 2

A credit manager reviews a customer's interest coverage ratio of 1.2. What risk does this present?

Accepted Answer

Moderate risk; the company barely covers its interest expense

Answer

An interest coverage ratio of 1.2 means earnings barely exceed interest obligations, leaving little buffer for earnings volatility and signaling moderate-to-high credit risk.

Question 3

Which financial statement best reveals whether a profitable company is generating sufficient cash to sustain operations?

Accepted Answer

Statement of cash flows

Answer

The statement of cash flows shows actual cash generated and used in operating, investing, and financing activities, revealing liquidity independent of accrual profits.

Question 4

In variance analysis, an unfavorable budget variance for sales revenue means:

Accepted Answer

Actual sales fell short of budgeted sales

Answer

An unfavorable revenue variance occurs when actual revenue is less than the budgeted amount, negatively impacting the company's financial performance.

Question 5

A company wants to determine its break-even point in units. Which formula is correct?

Accepted Answer

Fixed costs ÷ Contribution margin per unit

Answer

Break-even units = Fixed costs ÷ Contribution margin per unit, where contribution margin equals selling price minus variable cost per unit.

(CCM) Certified Credit Manager Practice Test

(CCM) Certified Credit Manager Practice Test

CCM Financial Management & Budgeting 3