CFC Business Financial Planning 2 — Questions and Answers
Question 1: Which ratio measures how quickly a business collects its accounts receivable?
- Inventory turnover ratio
- Accounts receivable turnover ratio (Correct answer)
- Current ratio
- Asset turnover ratio
Correct answer: Accounts receivable turnover ratio
Accounts receivable turnover equals net credit sales divided by average accounts receivable, measuring how efficiently a business collects on credit sales.
Question 2: A business owner's 'key man' insurance proceeds received by the company upon an owner's death are:
- Always tax-deductible premiums
- Generally received income-tax-free by the company (Correct answer)
- Included in the surviving owner's personal income
- Subject to capital gains tax
Correct answer: Generally received income-tax-free by the company
Life insurance death benefits received by a business are generally excluded from federal income tax under IRC Section 101(a), subject to the transfer-for-value rules.
Question 3: Under the qualified business income (QBI) deduction (Section 199A), eligible pass-through business owners may deduct up to what percentage of qualified business income?
- 10%
- 15%
- 20% (Correct answer)
- 25%
Correct answer: 20%
The Section 199A QBI deduction allows eligible owners of pass-through entities (sole proprietors, partnerships, S corps, some trusts) to deduct up to 20% of qualified business income.
Question 4: A business continuation plan funded with life insurance should be reviewed and updated when:
- Only at the owner's death
- Annually or when business value changes significantly (Correct answer)
- Only when a new owner joins
- Every ten years regardless of changes
Correct answer: Annually or when business value changes significantly
Buy-sell agreements and associated insurance funding should be reviewed regularly — ideally annually — and whenever major changes in business value, ownership, or personal circumstances occur.
Question 5: Which capital budgeting method measures the time required for a project's cumulative cash flows to recover the initial investment?
- Net present value (NPV)
- Internal rate of return (IRR)
- Payback period (Correct answer)
- Profitability index
Correct answer: Payback period
The payback period calculates how many years it takes for a project's undiscounted cumulative inflows to equal the initial outlay, assessing liquidity and risk.
Question 6: A CFC client is considering whether to lease or buy equipment. A key advantage of leasing is:
- Building equity in the asset over time
- Preserving capital and potentially keeping the liability off-balance-sheet (for operating leases) (Correct answer)
- Eliminating all maintenance responsibilities
- Always lower total cost over the asset's life
Correct answer: Preserving capital and potentially keeping the liability off-balance-sheet (for operating leases)
Operating leases preserve cash flow by avoiding large upfront capital outlays and, under older accounting rules, kept obligations off the balance sheet — though ASC 842 now requires most leases on-balance-sheet.
CFC Business Financial Planning 2
Which ratio measures how quickly a business collects its accounts receivable?