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
When comparing the profitability index (PI) to NPV for ranking projects under capital rationing, the PI is preferred because it:
Answer: Adjusts for project size, allowing comparison of value created per dollar invested
The PI (NPV / initial investment) normalizes returns per dollar of capital, making it ideal for ranking projects when funds are limited.
A company's budget shows a $200,000 unfavorable sales volume variance. Which explanation is most consistent with this result?
Answer: Actual unit sales were below the budgeted quantity
An unfavorable sales volume variance means actual units sold fell short of the budgeted quantity, reducing total contribution margin.
Which of the following is a characteristic of a cost center in responsibility accounting?
Answer: The manager is evaluated only on cost efficiency
A cost center manager is accountable solely for costs incurred, with performance measured by staying within or below budget.
A firm uses the internal rate of return (IRR) to evaluate a project. If the IRR exceeds the firm's hurdle rate, what decision rule applies?
Answer: Accept the project because it creates value above the required return
When IRR exceeds the hurdle rate (required rate of return), the project generates value beyond its cost of capital and should be accepted.
In preparing a cash budget, which of the following is NOT a cash inflow?
Answer: Depreciation expense
Depreciation is a non-cash accounting expense; it reduces net income but does not represent an actual cash outflow or inflow.
Transfer pricing between divisions of a company is set at full cost plus a markup. What problem can this create?
Answer: It may cause the buying division to reject transactions that are profitable for the firm as a whole
Full cost plus markup can make internally sourced goods appear expensive to the buying division, leading it to source externally even when internal transfer is more efficient overall.
Which of the following best describes the purpose of a 'budget variance report' provided to management?
Answer: To highlight differences between budgeted and actual results so corrective action can be taken
Variance reports compare actual performance to budget, enabling management to identify deviations and take corrective action through management by exception.