CME Financial Management & Budgeting 2

Question 1

A company uses zero-based budgeting (ZBB). What is the primary distinguishing feature of this approach?

Accepted Answer

Every expense must be justified from scratch each period

Answer

ZBB requires managers to justify every expense anew each budget cycle rather than starting from the prior year's figures.

Question 2

Which financial ratio best measures a company's ability to meet short-term obligations using only its most liquid assets?

Accepted Answer

Cash ratio

Answer

The cash ratio (cash + cash equivalents / current liabilities) uses only the most liquid assets, making it the most conservative short-term liquidity measure.

Question 3

When a budget is described as 'participative' or 'bottom-up,' what is the main advantage?

Accepted Answer

It increases manager buy-in and commitment to targets

Answer

Bottom-up budgeting improves motivation and commitment because managers who set their own targets feel greater ownership of results.

Question 4

A firm's EBITDA margin increased while its net profit margin decreased. Which scenario best explains this?

Accepted Answer

Interest expense and tax burden increased significantly

Answer

Rising interest or tax charges reduce net income without affecting EBITDA, causing the two margins to diverge.

Question 5

What does a negative operating cash flow combined with positive net income most likely indicate?

Accepted Answer

Working capital is being consumed, possibly by rising receivables or inventory

Answer

When net income is positive but operating cash flow is negative, the company is likely building up receivables or inventory that consumes cash.

(CME) Certified Management Executive Practice Test

(CME) Certified Management Executive Practice Test

CME Financial Management & Budgeting 2