COM Financial Management & Budgeting 2 — Questions and Answers
Question 1: A company's operating budget shows revenue of $500,000 and total costs of $420,000. What is the operating margin?
- 16% (Correct answer)
- 84%
- 19%
- 24%
Correct answer: 16%
Operating margin = (Revenue - Costs) / Revenue = $80,000 / $500,000 = 16%.
Question 2: Which budgeting technique requires every expense to be justified from scratch each budget cycle regardless of prior spending?
- Incremental budgeting
- Zero-based budgeting (Correct answer)
- Rolling budgeting
- Activity-based budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting starts from zero and requires justification for every line item each period.
Question 3: What does a negative cash conversion cycle indicate about a company?
- The company is insolvent
- The company collects cash before paying suppliers (Correct answer)
- The company has excessive inventory
- The company has poor receivables management
Correct 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.
Question 4: 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?
- Project B, due to lower risk
- Project A, because it has the higher NPV (Correct answer)
- Neither, if IRR is below WACC
- The one with the shorter payback period
Correct 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.
Question 5: In cost accounting, what is the primary purpose of a standard cost system?
- To record actual costs as incurred
- To provide a benchmark for comparing actual costs and identifying variances (Correct answer)
- To eliminate the need for budgeting
- To calculate depreciation schedules
Correct 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.
Question 6: Which financial ratio best measures a company's ability to meet short-term obligations using only its most liquid assets?
- Current ratio
- Debt-to-equity ratio
- Quick ratio (Correct answer)
- Return on assets
Correct answer: Quick ratio
The quick ratio excludes inventory from current assets, providing a stricter measure of immediate liquidity.
Question 7: A flexible budget differs from a static budget primarily because it:
- Is prepared quarterly instead of annually
- Adjusts expense allowances based on actual activity levels (Correct answer)
- Eliminates all fixed costs from analysis
- Requires approval from external auditors
Correct 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.
COM Financial Management & Budgeting 2
A company's operating budget shows revenue of $500,000 and total costs of $420,000.
What is the operating margin?