FREE CFM Budgeting & Forecasting Questions and Answers

Question 1

What is the main purpose of budgeting?

Accepted Answer

To plan and control finances

Answer

The main purpose of budgeting is to create a detailed financial plan that outlines expected revenues and expenses over a specific period. It serves as a roadmap for financial decision-making, helping organizations allocate resources effectively and control spending. Budgeting enables tracking progress against financial goals and identifying areas for improvement or adjustment.

Question 2

What is rolling forecasting?

Accepted Answer

Continuous updating forecast

Answer

Rolling forecasting is a dynamic budgeting and forecasting approach where a forecast is continuously updated by adding a new period (e.g., month or quarter) as the current one concludes, while dropping the oldest period. This creates a continuous, forward-looking view, typically for 12-18 months, allowing businesses to adapt quickly to changing market conditions and maintain relevance.

Question 3

Which budgeting method allocates resources based on last period?

Accepted Answer

Incremental budgeting

Answer

Incremental budgeting is a common budgeting method where the current budget is prepared by making small adjustments to the previous period's budget. It typically involves adding or subtracting a percentage to existing line items, assuming that past expenses and revenues are a good basis for future ones. This method is often simpler and less time-consuming than zero-based budgeting.

Question 4

What is a forecast in financial planning?

Accepted Answer

Prediction of future results

Answer

In financial planning, a forecast is an estimate or prediction of future financial results, such as sales, expenses, profits, or cash flows. Unlike a budget, which is a plan for what *should* happen, a forecast attempts to predict what *will* happen based on available data and assumptions. It helps businesses anticipate future performance and adjust strategies accordingly.

Question 5

Why is variance analysis important?

Accepted Answer

To identify performance gaps

Answer

Variance analysis is crucial because it compares actual financial results against budgeted or standard amounts. This process helps businesses identify significant deviations, known as performance gaps, in areas like costs or revenues. By understanding these differences, management can investigate their root causes and implement corrective actions to improve operational efficiency and financial performance.

CFM - Certified Finance Manager Practice Test

CFM - Certified Finance Manager Practice Test

FREE CFM Budgeting & Forecasting Questions and Answers