Finance for Non-Finance Managers Basic Finance 3 — Questions and Answers
Question 1: A non-finance manager is reviewing a budget variance report showing an 'unfavorable' variance. This means:
- Actual results were better than budgeted
- Actual costs were lower than budgeted
- Actual results were worse than budgeted (Correct answer)
- The budget was revised downward
Correct answer: Actual results were worse than budgeted
An unfavorable variance means actual performance missed the budget target — costs exceeded budget or revenues fell short.
Question 2: Which of the following is an example of a variable cost?
- Monthly office rent
- Annual insurance premium
- Raw materials used in production (Correct answer)
- Depreciation on equipment
Correct answer: Raw materials used in production
Raw materials are variable costs because they increase or decrease directly with production volume.
Question 3: What does ROI stand for, and what does it measure?
- Rate of Interest — the cost of borrowing
- Return on Investment — profitability relative to investment cost (Correct answer)
- Revenue over Income — total efficiency
- Risk of Insolvency — financial danger level
Correct answer: Return on Investment — profitability relative to investment cost
ROI (Return on Investment) measures how much profit or benefit is gained relative to the cost of an investment.
Question 4: A balance sheet must always satisfy which fundamental equation?
- Revenue = Expenses + Profit
- Assets = Liabilities + Equity (Correct answer)
- Cash In = Cash Out + Reserves
- Gross Profit = Net Profit + Taxes
Correct answer: Assets = Liabilities + Equity
The accounting equation Assets = Liabilities + Equity is the foundation of double-entry bookkeeping and every balance sheet.
Question 5: Depreciation is best described as:
- Cash set aside for future equipment purchases
- The allocation of an asset's cost over its useful life (Correct answer)
- Market value decline of an asset
- Annual maintenance expense for equipment
Correct answer: The allocation of an asset's cost over its useful life
Depreciation systematically allocates the cost of a long-term asset over its expected useful life as a non-cash expense.
Question 6: A company's quick ratio excludes inventory from current assets because:
- Inventory is a long-term asset
- Inventory may not be quickly converted to cash (Correct answer)
- Inventory is already included in accounts payable
- Inventory has no market value
Correct answer: Inventory may not be quickly converted to cash
The quick ratio excludes inventory because it may take time to sell, making it less 'liquid' than cash or receivables.
Question 7: Which of the following best describes working capital?
- Total assets minus total liabilities
- Long-term debt minus short-term debt
- Current assets minus current liabilities (Correct answer)
- Net income minus dividends paid
Correct answer: Current assets minus current liabilities
Working capital = Current Assets − Current Liabilities, measuring the funds available for day-to-day operations.
Finance for Non-Finance Managers Basic Finance 3
A non-finance manager is reviewing a budget variance report showing an 'unfavorable' variance.
This means: