Finance for Non-Finance Managers Basic Finance 5 — Questions and Answers
Question 1: A non-finance manager is told the company has a high operating leverage. This means:
- The company carries a lot of long-term debt
- Fixed costs are a large proportion of total costs (Correct answer)
- Variable costs dominate the cost structure
- The company invests heavily in working capital
Correct answer: Fixed costs are a large proportion of total costs
High operating leverage means fixed costs are dominant; a small change in sales volume causes a proportionally larger change in operating income.
Question 2: Which section of the cash flow statement would include the purchase of new manufacturing equipment?
- Operating activities
- Investing activities (Correct answer)
- Financing activities
- Non-cash activities
Correct answer: Investing activities
Purchases of long-term assets like equipment appear in investing activities on the cash flow statement.
Question 3: The time value of money concept states that:
- Money loses value when stored in banks
- A dollar received today is worth more than a dollar received in the future (Correct answer)
- Future cash flows are always larger than present values
- Inflation has no effect on investment decisions
Correct answer: A dollar received today is worth more than a dollar received in the future
A dollar today can be invested to earn returns, making it worth more than a dollar received at some point in the future.
Question 4: EBITDA is a financial metric that stands for:
- Earnings Before Interest, Taxes, Depreciation, and Amortization (Correct answer)
- Estimated Budget Including Total Debt Amounts
- Equity Balance In Total Debt Arrangements
- Earnings Before Inventory, Taxes, Dividends, and Accounts
Correct answer: Earnings Before Interest, Taxes, Depreciation, and Amortization
EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization, commonly used as a proxy for operating cash flow.
Question 5: A manager's department budget shows $50,000 in allocated overhead costs. These are most likely:
- Direct costs traceable to the department's products
- Indirect costs shared across multiple departments (Correct answer)
- Variable costs that change with department output
- One-time costs for a specific project
Correct answer: Indirect costs shared across multiple departments
Allocated overhead represents indirect costs (like building rent or utilities) spread across departments that cannot be directly traced to one area.
Question 6: A company's profit margin is 15% on $2 million in revenue. What is its net profit?
- $15,000
- $133,333
- $300,000 (Correct answer)
- $1,700,000
Correct answer: $300,000
Net profit = Revenue × Profit Margin = $2,000,000 × 0.15 = $300,000.
Question 7: Retained earnings on the balance sheet represent:
- Cash held in a reserve bank account
- Cumulative net profits kept in the business after dividends (Correct answer)
- Money borrowed and not yet repaid
- Revenue earned but not yet collected
Correct answer: Cumulative net profits kept in the business after dividends
Retained earnings are the accumulated net profits reinvested in the business rather than distributed to shareholders as dividends.
Finance for Non-Finance Managers Basic Finance 5
A non-finance manager is told the company has a high operating leverage.
This means: