CVPM Financial Management and Budgeting 5 — Questions and Answers
Question 1: Which financial statement would a practice manager review to determine whether the practice owns more than it owes at a specific point in time?
- Income statement
- Statement of retained earnings
- Balance sheet (Correct answer)
- Cash flow statement
Correct answer: Balance sheet
The balance sheet shows assets, liabilities, and owner's equity at a specific date, revealing whether total assets exceed total liabilities.
Question 2: A practice manager wants to reduce days sales outstanding (DSO). Which strategy would be most effective?
- Increasing the number of credit accounts offered
- Implementing stricter collection policies and offering payment at time of service (Correct answer)
- Reducing service prices to attract more clients
- Increasing staff to process more appointments
Correct answer: Implementing stricter collection policies and offering payment at time of service
Requiring payment at time of service and enforcing collection policies directly reduces the average number of days receivables remain outstanding.
Question 3: In a veterinary practice's chart of accounts, what type of account is 'unearned revenue' from prepaid wellness plans?
- Asset
- Liability (Correct answer)
- Equity
- Revenue
Correct answer: Liability
Prepaid wellness plan payments received before services are delivered represent a liability (unearned revenue) until the services are performed.
Question 4: What is the primary advantage of using a rolling 12-month budget compared to a traditional annual budget?
- It requires less time to prepare each year
- It always maintains a full year's forward-looking projection as each month passes (Correct answer)
- It eliminates the need for variance analysis
- It guarantees more accurate revenue forecasting
Correct answer: It always maintains a full year's forward-looking projection as each month passes
A rolling budget adds a new month as each month ends, ensuring managers always have a full 12-month forward view for planning purposes.
Question 5: A veterinary practice has $500,000 in total assets and $200,000 in total liabilities. What is the debt-to-asset ratio?
- 0.25
- 0.40 (Correct answer)
- 0.60
- 2.50
Correct answer: 0.40
Debt-to-asset ratio = Total Liabilities ÷ Total Assets = $200,000 ÷ $500,000 = 0.40, meaning 40% of assets are financed by debt.
Question 6: Which cost behavior pattern remains constant in total regardless of patient visit volume within a relevant range?
- Variable costs
- Semi-variable costs
- Fixed costs (Correct answer)
- Mixed costs
Correct answer: Fixed costs
Fixed costs such as rent, insurance, and loan payments remain constant in total regardless of how many patients are seen within a given range.
Question 7: When analyzing a veterinary practice for potential acquisition, which financial document best reveals the practice's normalized earning power after adjusting for owner compensation and one-time expenses?
- Tax return Schedule C
- Seller's discretionary earnings (SDE) statement (Correct answer)
- Accounts receivable aging report
- Employee payroll register
Correct answer: Seller's discretionary earnings (SDE) statement
Seller's discretionary earnings normalize the income statement by adding back owner compensation, benefits, and non-recurring expenses to show true earning potential.
CVPM Financial Management and Budgeting 5
Which financial statement would a practice manager review to determine whether the practice owns more than it owes at a specific point in time?