CFO Financial Planning — Questions and Answers

Question 1: A CFO wants a budget that automatically adjusts expense allowances to actual sales volume. Which budget type fits best?

Static budget
Flexible budget (Correct answer)
Incremental budget
Capital budget

Correct answer: Flexible budget

A flexible budget recalculates costs for the actual activity level, which makes variance analysis meaningful.

Question 2: Which approach requires every expense to be justified from scratch each planning cycle?

Incremental budgeting
Activity-based budgeting
Zero-based budgeting (Correct answer)
Rolling budgeting

Correct answer: Zero-based budgeting

Zero-based budgeting starts each cost line at zero and requires a justification for each one.

Question 3: A company always keeps a 12-month forecast horizon by adding a new month as each month ends. What is this called?

Rolling forecast (Correct answer)
Static forecast
Master budget
Long-range plan

Correct answer: Rolling forecast

A rolling forecast keeps a constant forward horizon by adding a new period as each one closes.

Question 4: In a master budget, which component is normally prepared first because the others depend on it?

Cash budget
Production budget
Capital expenditure budget
Sales budget (Correct answer)

Correct answer: Sales budget

The sales forecast drives production, purchasing, labor, overhead, and cash budgets.

Question 5: Budgeted sales are 10,000 units, beginning finished goods are 1,500 units, and desired ending finished goods are 2,000 units. How many units must be produced?

9,500
10,500 (Correct answer)
11,500
12,000

Correct answer: 10,500

Production equals sales plus desired ending inventory minus beginning inventory: 10,000 + 2,000 − 1,500 = 10,500.

Question 6: What is the main weakness of a top-down budgeting process?

It takes longer than any other method
It ignores strategic goals
It can lack buy-in from operating managers (Correct answer)
It cannot be used by public companies

Correct answer: It can lack buy-in from operating managers

Targets imposed by senior leadership may feel unrealistic to the managers who must deliver them, which weakens commitment.

Question 7: Managers deliberately understate revenue and overstate expenses so their targets are easier to hit. What is this called?

Budgetary slack (Correct answer)
Goal congruence
Management by exception
Sensitivity analysis

Correct answer: Budgetary slack

Budgetary slack, also called padding, builds easy cushions into targets.

Question 8: Which statement best describes the cash conversion cycle?

DSO + DPO − DIO
DIO + DSO − DPO (Correct answer)
DPO + DIO − DSO
DSO − DIO − DPO

Correct answer: DIO + DSO − DPO

The cash conversion cycle equals days inventory outstanding plus days sales outstanding minus days payables outstanding.

Question 9: A firm's DIO is 45 days, DSO is 40 days, and DPO is 30 days. What is its cash conversion cycle?

25 days
35 days
55 days (Correct answer)
115 days

Correct answer: 55 days

45 + 40 − 30 = 55 days.

Question 10: Which financing choice best matches the funding of a new 15-year manufacturing plant?

Long-term debt or equity (Correct answer)
A revolving credit line
Commercial paper
Stretching accounts payable

Correct answer: Long-term debt or equity

The matching principle pairs long-lived assets with long-term funding sources.

Question 11: What does the sustainable growth rate measure?

The maximum growth with no external financing at all
The industry's long-run average growth
The growth rate implied by the share price
The maximum growth without issuing new equity while keeping leverage constant (Correct answer)

Correct answer: The maximum growth without issuing new equity while keeping leverage constant

The sustainable growth rate equals ROE times the retention ratio, assuming constant leverage and no new equity.

Question 12: ROE is 18% and the dividend payout ratio is 40%. What is the sustainable growth rate, using the simple formula?

7.2%
18.0%
10.8% (Correct answer)
22.0%

Correct answer: 10.8%

SGR = ROE × retention = 18% × 0.60 = 10.8%.

Question 13: In the percent-of-sales method, what does a positive external financing needed (EFN) figure indicate?

Projected asset growth exceeds spontaneous liabilities plus retained earnings (Correct answer)
The firm has excess cash to repurchase shares
Sales are projected to decline
The dividend payout is too low

Correct answer: Projected asset growth exceeds spontaneous liabilities plus retained earnings

A positive EFN means the internal and spontaneous funding sources cannot cover the required asset growth.

Question 14: Which item is generally treated as a spontaneous liability in financial forecasting?

Long-term bonds
Notes payable to banks
Common stock
Accounts payable (Correct answer)

Correct answer: Accounts payable

Accounts payable and accruals rise naturally with sales, without any new financing decision.

Question 15: A CFO changes one input, such as price, at a time to see how NPV responds. What is this technique?

Monte Carlo simulation
Sensitivity analysis (Correct answer)
Scenario analysis
Regression analysis

Correct answer: Sensitivity analysis

Sensitivity analysis isolates how a single variable affects the outcome.

Question 16: Which technique runs thousands of iterations using probability distributions for several inputs?

Break-even analysis
Scenario analysis
Monte Carlo simulation (Correct answer)
Trend analysis

Correct answer: Monte Carlo simulation

Monte Carlo simulation samples random input values repeatedly to build a distribution of outcomes.

Question 17: Fixed costs are $600,000, the selling price is $50 per unit, and variable cost is $30 per unit. What is the break-even point in units?

12,000
20,000
24,000
30,000 (Correct answer)

Correct answer: 30,000

Break-even = $600,000 ÷ ($50 − $30) = 30,000 units.

Question 18: Which planning tool links strategic objectives to financial, customer, internal process, and learning-and-growth measures?

Balanced scorecard (Correct answer)
Gantt chart
Pareto analysis
Cost-volume-profit chart

Correct answer: Balanced scorecard

The Kaplan-Norton balanced scorecard translates strategy into measures across four perspectives.

Question 19: Scenario analysis differs from sensitivity analysis mainly because it:

Uses only historical data
Changes several related inputs together to reflect a coherent future state (Correct answer)
Cannot be applied to capital budgeting
Always assigns equal probabilities to outcomes

Correct answer: Changes several related inputs together to reflect a coherent future state

Scenarios such as base, best, and worst case move several assumptions together in a consistent way.

Question 20: Driver-based planning builds forecasts mainly from:

Last year's actuals plus a fixed percentage
Board-mandated targets only
Operational metrics that cause financial results (Correct answer)
Analyst consensus estimates

Correct answer: Operational metrics that cause financial results

Driver-based models link financial outcomes to underlying operational drivers, such as headcount, units, or conversion rates.

Question 21: Degree of operating leverage is 3. If sales rise 10%, operating income should rise by roughly:

30% (Correct answer)
3%
10%
13%

Correct answer: 30%

Percentage change in EBIT ≈ DOL × percentage change in sales = 3 × 10% = 30%.

CFO Financial Planning

A CFO wants a budget that automatically adjusts expense allowances to actual sales volume.
Which budget type fits best?

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