CMM Financial Management 2 — Questions and Answers
Question 1: Which financial metric measures the percentage of each revenue dollar remaining after paying variable costs?
- Gross profit margin
- Contribution margin ratio (Correct answer)
- Operating margin
- Net profit margin
Correct answer: Contribution margin ratio
The contribution margin ratio is calculated as (Revenue - Variable Costs) / Revenue, showing what portion of each dollar contributes to fixed costs and profit.
Question 2: A medical practice's accounts receivable days outstanding (ARDO) increased from 42 to 58 days. What does this MOST likely indicate?
- Improved billing efficiency
- Decreased patient volume
- Slower collections or billing problems (Correct answer)
- Higher reimbursement rates
Correct answer: Slower collections or billing problems
An increasing ARDO signals that it is taking longer to collect payments, which may indicate billing errors, payer delays, or inadequate follow-up processes.
Question 3: Under accrual accounting, when is revenue recognized in a medical practice?
- When the patient pays the bill
- When the insurance payment clears the bank
- When services are rendered (Correct answer)
- When the claim is submitted to the payer
Correct answer: When services are rendered
Accrual accounting recognizes revenue when services are delivered, regardless of when payment is actually received.
Question 4: Which budgeting approach requires managers to justify every expense from zero each budget cycle?
- Incremental budgeting
- Zero-based budgeting (Correct answer)
- Rolling budgeting
- Flexible budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting starts from a 'zero base' each period, requiring justification for all expenditures rather than simply adjusting prior-year figures.
Question 5: A practice is evaluating a new EMR system costing $200,000. If the expected annual savings are $50,000, what is the simple payback period?
- 2 years
- 3 years
- 4 years (Correct answer)
- 5 years
Correct answer: 4 years
Simple payback period = Initial Investment / Annual Savings = $200,000 / $50,000 = 4 years.
Question 6: What is the primary purpose of a practice's operating budget?
- Plan capital equipment purchases
- Project long-term debt financing
- Forecast expected revenues and expenses over a defined period (Correct answer)
- Manage the practice's investment portfolio
Correct answer: Forecast expected revenues and expenses over a defined period
An operating budget is a financial plan that projects revenues, expenses, and resulting net income for a specific future period, usually one year.
Question 7: Which of the following best describes 'overhead' in a medical practice?
- Direct costs tied to physician productivity
- Costs not directly attributable to generating patient revenue (Correct answer)
- Variable costs that change with patient volume
- Costs associated only with medical supplies
Correct answer: Costs not directly attributable to generating patient revenue
Overhead encompasses all costs that are not directly tied to generating patient revenue, such as rent, administrative salaries, and utilities.
CMM Financial Management 2
Which financial metric measures the percentage of each revenue dollar remaining after paying variable costs?