Financial Management & Budgeting Flashcards
7 cards from real CME practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Financial Management & Budgeting flashcards as text
A company uses zero-based budgeting (ZBB). What is the primary distinguishing feature of this approach?
Answer: Every expense must be justified from scratch each period
ZBB requires managers to justify every expense anew each budget cycle rather than starting from the prior year's figures.
Which financial ratio best measures a company's ability to meet short-term obligations using only its most liquid assets?
Answer: Cash ratio
The cash ratio (cash + cash equivalents / current liabilities) uses only the most liquid assets, making it the most conservative short-term liquidity measure.
When a budget is described as 'participative' or 'bottom-up,' what is the main advantage?
Answer: It increases manager buy-in and commitment to targets
Bottom-up budgeting improves motivation and commitment because managers who set their own targets feel greater ownership of results.
A firm's EBITDA margin increased while its net profit margin decreased. Which scenario best explains this?
Answer: Interest expense and tax burden increased significantly
Rising interest or tax charges reduce net income without affecting EBITDA, causing the two margins to diverge.
What does a negative operating cash flow combined with positive net income most likely indicate?
Answer: Working capital is being consumed, possibly by rising receivables or inventory
When net income is positive but operating cash flow is negative, the company is likely building up receivables or inventory that consumes cash.
In capital budgeting, the 'payback period' method is criticized primarily because it:
Answer: Ignores the time value of money and cash flows after payback
The payback period ignores the time value of money and any cash flows that occur after the initial investment is recovered.
A rolling forecast differs from a traditional annual budget primarily in that it:
Answer: Extends the forecast horizon continuously as each period passes
A rolling forecast is updated regularly so that the planning horizon always extends the same number of periods into the future.