COA COA Financial Management & Budgeting 5 — Questions and Answers
Question 1: When preparing a departmental budget, which expense would typically be classified as a direct cost?
- Building maintenance shared across all departments
- CEO salary allocated company-wide
- Office supplies purchased specifically for that department (Correct answer)
- General liability insurance for the whole company
Correct answer: Office supplies purchased specifically for that department
Direct costs are directly traceable to a specific department or cost center, such as supplies purchased exclusively for that department's use.
Question 2: What is the primary purpose of a budget variance report?
- To record all financial transactions for the period
- To compare actual spending against budgeted amounts and identify differences (Correct answer)
- To project future cash flow needs
- To summarize year-end tax obligations
Correct answer: To compare actual spending against budgeted amounts and identify differences
A budget variance report highlights the differences between planned budget figures and actual expenditures, enabling corrective action.
Question 3: An unfavorable budget variance in office supplies means the department:
- Spent less than budgeted
- Spent exactly as budgeted
- Spent more than budgeted (Correct answer)
- Did not use any office supplies
Correct answer: Spent more than budgeted
An unfavorable (or adverse) variance occurs when actual costs exceed the budgeted amount, indicating overspending.
Question 4: Which of the following best describes 'accrual basis' accounting?
- Revenue and expenses are recorded only when cash is received or paid
- Revenue is recorded when earned and expenses when incurred, regardless of cash flow (Correct answer)
- Only cash transactions are recorded at month-end
- Expenses are recorded only when invoices are received
Correct answer: Revenue is recorded when earned and expenses when incurred, regardless of cash flow
Accrual basis accounting recognizes revenue when earned and expenses when incurred, matching them to the period they relate to regardless of cash movement.
Question 5: A company's gross profit is calculated by subtracting which of the following from net sales?
- Operating expenses
- Net income
- Cost of goods sold (Correct answer)
- Total liabilities
Correct answer: Cost of goods sold
Gross profit = Net Sales minus Cost of Goods Sold (COGS), representing profit before operating expenses are deducted.
Question 6: What is the purpose of a purchase order (PO) in office financial management?
- To record payment confirmation sent to a vendor
- To authorize a specific purchase and establish a contractual agreement with the supplier (Correct answer)
- To track employee expense reimbursements
- To document items received from a vendor
Correct answer: To authorize a specific purchase and establish a contractual agreement with the supplier
A purchase order is an official document authorizing a purchase, specifying items, quantities, and prices, forming a binding agreement with the supplier.
Question 7: If a company has total assets of $500,000 and total liabilities of $320,000, what is the owner's equity?
- $820,000
- $320,000
- $180,000 (Correct answer)
- $500,000
Correct answer: $180,000
The accounting equation states Assets = Liabilities + Owner's Equity, so Owner's Equity = $500,000 - $320,000 = $180,000.
COA COA Financial Management & Budgeting 5
When preparing a departmental budget, which expense would typically be classified as a direct cost?