CPM Financial Management & Budgeting 3 — Questions and Answers
Question 1: A rolling budget (continuous budget) differs from a static annual budget primarily because it:
- Uses only fixed costs for planning
- Is updated periodically by adding a future period as the most recent period ends (Correct answer)
- Eliminates variance reporting requirements
- Focuses exclusively on capital expenditures
Correct answer: Is updated periodically by adding a future period as the most recent period ends
A rolling budget continuously extends the planning horizon by adding a new period (e.g., a month or quarter) each time one expires, keeping a constant forward-looking window.
Question 2: What is the primary purpose of a cash flow forecast in operational management?
- Calculating depreciation schedules
- Ensuring the organization has sufficient liquidity to meet obligations (Correct answer)
- Determining product profitability
- Evaluating employee performance
Correct answer: Ensuring the organization has sufficient liquidity to meet obligations
Cash flow forecasting identifies when cash inflows and outflows will occur, allowing managers to ensure funds are available to meet obligations.
Question 3: The contribution margin is best defined as:
- Total revenue minus total fixed costs
- Selling price per unit minus variable cost per unit (Correct answer)
- Net profit after taxes
- Gross revenue minus cost of goods sold
Correct answer: Selling price per unit minus variable cost per unit
Contribution margin equals selling price minus variable cost per unit, representing the amount each unit contributes toward covering fixed costs and generating profit.
Question 4: A manager is evaluating a capital investment using the payback period method. What is its main limitation?
- It requires complex calculations
- It ignores the time value of money and cash flows beyond the payback period (Correct answer)
- It only works for projects under $100,000
- It cannot be used for equipment purchases
Correct answer: It ignores the time value of money and cash flows beyond the payback period
The payback period method ignores the time value of money and disregards profitability or cash flows that occur after the investment is recovered.
Question 5: Which type of cost remains constant in total regardless of production volume within the relevant range?
- Variable cost
- Semi-variable cost
- Fixed cost (Correct answer)
- Marginal cost
Correct answer: Fixed cost
Fixed costs (e.g., rent, salaries) do not change with production volume within the relevant range, though the per-unit fixed cost decreases as output increases.
Question 6: When preparing a departmental budget, the manager should FIRST:
- Identify line-item expenditures from last year
- Align the budget with organizational strategic goals and anticipated activities (Correct answer)
- Submit a variance justification report
- Determine the depreciation method for fixed assets
Correct answer: Align the budget with organizational strategic goals and anticipated activities
Effective budgeting begins by understanding strategic objectives so that resource allocation supports the organization's priorities.
Question 7: Accounts receivable turnover ratio measures:
- How quickly inventory is sold
- How efficiently a company collects cash from credit customers (Correct answer)
- The ratio of debt to equity
- How much profit is generated per dollar of assets
Correct answer: How efficiently a company collects cash from credit customers
Accounts receivable turnover (net credit sales ÷ average accounts receivable) indicates how many times per period the company collects its average receivables balance.
CPM Financial Management & Budgeting 3
A rolling budget (continuous budget) differs from a static annual budget primarily because it: