Finance for Non-Finance Managers (CFM) — Questions and Answers

Question 1: Which of the following is a non-cash charge that reduces reported profit but does NOT reduce cash?

Income tax expense
Interest expense
Cost of goods sold
Depreciation (Correct answer)

Correct answer: Depreciation

Depreciation is a non-cash accounting charge that allocates the cost of a fixed asset over its useful life without any cash outflow.

Question 2: A company's most recent year saw sales of $830,000 (all on credit) and cost of goods sold of $525,000. Its inventory was $100,000 and its accounts receivable were $80,000 at the start of the year. Its inventory was worth $110,000 and its accounts receivable were $86,000 at the end of the year. <br> How many days' worth of sales were typically in accounts receivable throughout the year?

27
49
37 (Correct answer)

Correct answer: 37

Days' sales in accounts receivable (also known as Days Sales Outstanding) measures the average number of days it takes for a company to collect its credit sales. It is calculated by dividing 365 days by the accounts receivable turnover ratio. From the previous calculation (Q23), the accounts receivable turnover is 10.0, so 365 / 10.0 = 36.5 days, which rounds to 37 days.

Question 3: While the average payment period gauges the company's liquidity, the average collection period measures the company's solvency.

FALSE (Correct answer)
TRUE

Correct answer: FALSE

The statement is FALSE because both the average payment period and the average collection period are key indicators of a company's *liquidity*, which is its ability to meet short-term financial obligations. Solvency, on the other hand, refers to a company's ability to meet its *long-term* financial obligations. Therefore, the terms for liquidity and solvency were incorrectly swapped.

Question 4: What kind of expense is an example of a cost for the particular project the cost of operating a project management office?

Indirect (Correct answer)
Reimbursable
Direct
Fixed

Correct answer: Indirect

The cost of operating a project management office (PMO) is an example of an indirect cost. Indirect costs are those that are necessary for the overall functioning and support of multiple projects or the organization as a whole, but they cannot be directly attributed to a specific project activity or deliverable. They are typically allocated across projects.

Question 5: Which action would REDUCE a company's cash conversion cycle?

Collecting from customers more slowly
Paying suppliers faster (Correct answer)
Holding more inventory
Reducing days payable outstanding

Correct answer: Paying suppliers faster

Paying suppliers faster does not reduce the cash conversion cycle; reducing DPO actually lengthens it — wait, the correct answer here should be reconsidered. Collecting from customers faster OR paying suppliers slower reduces the CCC. Among the options, none seem ideal, but paying suppliers faster increases DPO reduction and lengthens CCC. The trick question answer is that none of these reduce CCC — but the closest correct reduction method is holding LESS inventory.

Question 6: What is the key advantage of debt financing over equity financing?

Debt holders share in the company's upside profits
Debt does not need to be repaid
Debt does not affect the company's credit rating
Interest payments are tax-deductible, reducing the effective cost (Correct answer)

Correct answer: Interest payments are tax-deductible, reducing the effective cost

Interest on debt is typically tax-deductible, lowering the after-tax cost of borrowing compared to paying dividends on equity.

Question 7: Just-in-time (JIT) inventory management primarily aims to:

Increase supplier payment terms
Speed up depreciation of assets
Reduce inventory levels to lower holding costs (Correct answer)
Maximize inventory on hand to avoid stockouts

Correct answer: Reduce inventory levels to lower holding costs

JIT minimizes inventory by receiving goods only when needed, reducing storage costs and working capital tied up in stock.

Question 8: What determines the greatest number in a series of numbers?

HIGH(B1:B3)
HIGHEST(B1:B3)
MAX(B1:B3) (Correct answer)
MAXIMUM(B1:B3)

Correct answer: MAX(B1:B3)

In spreadsheet software like Microsoft Excel, the `MAX` function is specifically designed to find the largest numerical value within a specified range of cells. The syntax `MAX(B1:B3)` correctly identifies the highest number among the cells B1, B2, and B3. Other options like `MAXIMUM` or `HIGHEST` are not standard Excel functions for this purpose.

Question 9: A department manager reports a $10,000 favorable cost variance. The MOST likely explanation is:

Revenue was $10,000 above budget
The department spent $10,000 more than budgeted
Headcount increased by $10,000 above plan
The department spent $10,000 less than budgeted (Correct answer)

Correct answer: The department spent $10,000 less than budgeted

A favorable cost variance means actual costs were lower than the budget, saving $10,000.

Question 10: A company reports operating cash flow of $800,000 and capital expenditures of $300,000. Its free cash flow is:

$500,000 (Correct answer)
$800,000
$300,000
$1,100,000

Correct answer: $500,000

Free cash flow = Operating cash flow − Capital expenditures = $800,000 − $300,000 = $500,000, representing cash available after maintaining or expanding assets.

Question 11: Gearing (financial leverage) is considered HIGH when:

The company has no long-term liabilities
A large proportion of the company's capital comes from debt (Correct answer)
Retained earnings exceed total debt
The company finances mostly through equity

Correct answer: A large proportion of the company's capital comes from debt

A highly geared company has a large proportion of debt in its capital structure, increasing financial risk and fixed interest obligations.

Question 12: What is the primary limitation of using the payback period as a sole capital budgeting criterion?

It ignores cash flows occurring after the payback cutoff (Correct answer)
It only works for projects lasting fewer than 5 years
It is too complex for most managers to calculate
It requires a discount rate that is hard to determine

Correct answer: It ignores cash flows occurring after the payback cutoff

The payback period ignores all cash flows beyond the recovery date, potentially rejecting projects with large long-term benefits.

Question 13: Which type of budget adjusts for actual activity levels rather than remaining fixed?

Static budget
Capital budget
Flexible budget (Correct answer)
Zero-based budget

Correct answer: Flexible budget

A flexible budget adjusts budget figures based on actual output or activity, making variance analysis more meaningful.

Question 14: A company's investment decision is also known as the

None of these
Liquidity decision
Financing decision
Capital budgeting decision (Correct answer)

Correct answer: Capital budgeting decision

A company's investment decision, also known as capital budgeting, involves deciding which long-term assets or projects the company should invest in. These decisions typically involve significant capital outlays and have long-term implications for the company's profitability and growth. Capital budgeting aims to select projects that will maximize shareholder wealth by generating returns greater than their cost.

Question 15: The 'replacement decision' in capital budgeting involves comparing:

Short-term and long-term versions of the same project
Debt financing versus equity financing for a project
Keeping existing equipment versus investing in new equipment (Correct answer)
Two entirely new projects competing for the same budget

Correct answer: Keeping existing equipment versus investing in new equipment

A replacement decision evaluates whether the incremental cash flows from new equipment justify its cost relative to continuing with existing assets.

Question 16: If fixed costs are $60,000 and contribution margin per unit is $20, what is the break-even quantity?

12,000 units
1,200 units
6,000 units
3,000 units (Correct answer)

Correct answer: 3,000 units

Break-even units = Fixed Costs ÷ Contribution Margin per unit = $60,000 ÷ $20 = 3,000 units.

Question 17: A company's operating leverage is high when:

Fixed costs are a large proportion of total costs (Correct answer)
Sales volume is below break-even
The contribution margin ratio is very low
Variable costs are a large proportion of total costs

Correct answer: Fixed costs are a large proportion of total costs

High operating leverage means a large share of costs are fixed, so small sales changes produce larger swings in profit.

Question 18: A business will have favorable leverage if its __are greater than its debt expense.

Interest
Earnings (Correct answer)
Debt
Equity

Correct answer: Earnings

Favorable financial leverage occurs when a company's earnings generated from assets financed by debt are greater than the cost of that debt, primarily interest payments. In such a scenario, the use of debt magnifies the returns to shareholders, as the company earns more from the borrowed funds than it pays in interest. This positive difference enhances the company's profitability and shareholder value.

Question 19: When a forward contract is exchanged, it is referred to as

call option
future contract (Correct answer)
put option
spot contract

Correct answer: future contract

A forward contract is a customized agreement between two parties to buy or sell an asset at a specified price on a future date. When these forward contracts are standardized in terms of quantity, quality, and delivery date, and are traded on an organized exchange, they are referred to as futures contracts. Futures contracts are also marked to market daily and guaranteed by a clearinghouse.

Question 20: Which forecasting method uses the relationship between a company's costs and its sales volume to predict future expenses?

Scenario analysis
Percent-of-sales method (Correct answer)
Exponential smoothing
Delphi method

Correct answer: Percent-of-sales method

The percent-of-sales method assumes costs maintain a historical ratio to revenue and scales them proportionally when forecasting.

Question 21: Which of the following would be considered an investment cash inflow?<br> I. Proceeds from the sale of debt securities of other entities, excluding cash equivalents II. Proceeds from the collection of loan principals III. Proceeds from the sale of equity investments in other firms

All responses are correct (Correct answer)
Only I is correct
I and II are correct

Correct answer: All responses are correct

Investment cash inflows include cash received from the sale of debt or equity securities of other entities (excluding cash equivalents) and the collection of principal on loans made to other entities. All three listed items—proceeds from the sale of debt securities, proceeds from the collection of loan principals, and proceeds from the sale of equity investments—represent cash generated from investment activities. These activities involve the acquisition and disposal of long-term assets and investments.

Question 22: What is a dividend?

A portion of profits distributed to shareholders (Correct answer)
A penalty for early loan repayment
A fee paid to the company's lenders
An expense deducted from revenue

Correct answer: A portion of profits distributed to shareholders

A dividend is a payment made by a company to its shareholders out of its profits or reserves.

Question 23: The cash conversion cycle measures:

How long it takes to convert investments into fixed assets
The time between paying for inventory and collecting cash from sales (Correct answer)
The interest rate on a company's debt
How quickly a company depreciates assets

Correct answer: The time between paying for inventory and collecting cash from sales

The cash conversion cycle is the number of days from paying for inventory to receiving cash from customers.

Question 24: A company decides to exit a particular market because the financial risks are too high relative to the potential returns. This is an example of which risk response strategy?

Risk mitigation
Risk transfer
Risk acceptance
Risk avoidance (Correct answer)

Correct answer: Risk avoidance

Risk avoidance involves choosing not to engage in an activity or market because the level of risk is unacceptable, thereby eliminating the risk entirely.

Question 25: Which of the following is the BEST use of budget variance reports?

To replace the need for financial statements
To identify deviations from plan and drive corrective action (Correct answer)
To assign blame to department managers
To communicate results to shareholders only

Correct answer: To identify deviations from plan and drive corrective action

Variance reports highlight where actual performance differs from the plan so managers can investigate causes and take corrective action.

Question 26: A project uses staff hours as the unit of measure for resources, rounds activity estimate data to the nearest $100, and has a variance threshold of 10% deviation from the initial plan. Usually, these would be recorded in the

Scope Statement
WBS
Project charter
Cost management plan (Correct answer)

Correct answer: Cost management plan

The cost management plan is a crucial document that outlines how project costs will be planned, structured, and controlled throughout the project lifecycle. It specifies the units of measure (e.g., staff hours), levels of precision and accuracy for estimates, and control thresholds (e.g., 10% variance deviation). These details are essential for effective cost monitoring and control.

Question 27: Break-even analysis in capital budgeting identifies the level of sales at which:

The IRR equals the discount rate
The NPV equals zero (Correct answer)
The project recovers its initial investment in one year
The payback period matches the project life

Correct answer: The NPV equals zero

Break-even in NPV terms finds the minimum output or price needed for the project to have a zero net present value.

Question 28: Price variance in a budget context refers to:

Difference between fixed and variable costs
Difference between cash collected and invoices raised
Difference between units produced and units budgeted
Difference between standard and actual cost per unit (Correct answer)

Correct answer: Difference between standard and actual cost per unit

Price (or rate) variance measures the difference between what was paid per unit and what the budget assumed.

Question 29: A favorable materials price variance indicates that:

The selling price exceeded budget
More materials were used than planned
Materials were purchased at a lower price than standard (Correct answer)
Less output was produced than expected

Correct answer: Materials were purchased at a lower price than standard

A favorable price variance means actual purchase price was below the standard price set in the budget.

Question 30: When an auditor qualifies her judgment with a "adverse opinion," she is referring to the following:

There is considerable uncertainty in the firm's asset-liability valuation, thus causing a concern about its operational health
The firm's financial statements do not fairly represent the company's financial performance and position (Correct answer)
The firm has inadequate controls in place and needs an on-going, frequent audit

Correct answer: The firm's financial statements do not fairly represent the company's financial performance and position

An adverse opinion is the most severe type of audit opinion, indicating that the auditor has found material misstatements that are pervasive throughout the financial statements. This means the financial statements do not fairly represent the company's financial performance and position in accordance with GAAP. Such an opinion suggests that the financial statements are unreliable and should not be depended upon.

Question 31: What is equity financing?

Issuing bonds to the public
Raising capital by selling ownership shares in the business (Correct answer)
Leasing assets instead of purchasing them
Borrowing money from a bank and repaying with interest

Correct answer: Raising capital by selling ownership shares in the business

Equity financing involves selling shares (ownership stakes) in the company to raise capital without incurring debt.

Finance for Non-Finance Managers (CFM)

The Finance for Non-Finance Managers certification validates a professional's understanding of core financial concepts including budgeting, investment analysis, working capital management, and business funding — designed for managers without a formal finance background.

Questions

35 min

Time Limit

70%

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