Financial Management & Budgeting Flashcards

A company's operating budget shows revenue of $500,000 and total costs of $420,000. What is the operating margin?

Answer: 16%

Operating margin = (Revenue - Costs) / Revenue = $80,000 / $500,000 = 16%.

Which budgeting technique requires every expense to be justified from scratch each budget cycle regardless of prior spending?

Answer: Zero-based budgeting

Zero-based budgeting starts from zero and requires justification for every line item each period.

What does a negative cash conversion cycle indicate about a company?

Answer: The company collects cash before paying suppliers

A negative cash conversion cycle means the company receives payment from customers before it must pay its suppliers.

An operations manager needs to choose between two capital projects with equal investment. Project A has NPV of $45,000 and Project B has NPV of $38,000. Which should be selected?

Answer: Project A, because it has the higher NPV

When comparing mutually exclusive projects with equal investment, the project with the higher NPV creates more shareholder value.

In cost accounting, what is the primary purpose of a standard cost system?

Answer: To provide a benchmark for comparing actual costs and identifying variances

Standard costs serve as benchmarks so managers can measure performance by analyzing variances from expected costs.

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

Answer: Quick ratio

The quick ratio excludes inventory from current assets, providing a stricter measure of immediate liquidity.

A flexible budget differs from a static budget primarily because it:

Answer: Adjusts expense allowances based on actual activity levels

A flexible budget recalculates budgeted costs at the actual activity level, enabling more meaningful variance analysis.