Gemology Certification Financial Management & Budgeting 3 — Questions and Answers
Question 1: A gemology studio plans to buy a new spectroscope for $6,000 that will last 5 years with no salvage value. What is the annual straight-line depreciation?
- $1,000
- $1,200 (Correct answer)
- $1,500
- $600
Correct answer: $1,200
Annual depreciation = ($6,000 - $0) / 5 years = $1,200 per year.
Question 2: Which budgeting approach requires every expense to be justified from scratch each period, rather than basing it on prior-year figures?
- Incremental budgeting
- Zero-based budgeting (Correct answer)
- Rolling budget
- Activity-based budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting starts from zero each period and requires justification for all expenditures, not just changes from the prior budget.
Question 3: A gem dealer needs to maintain a minimum cash balance of $5,000. If projected cash inflows are $18,000 and outflows are $16,500, does the dealer need external financing?
- Yes, a shortfall of $3,500 exists
- No, net cash of $1,500 covers the minimum (Correct answer)
- Yes, a shortfall of $5,000 exists
- No, the outflows are covered by the minimum balance
Correct answer: No, net cash of $1,500 covers the minimum
Net inflows of $1,500 fall short of the $5,000 minimum balance, so $3,500 in external financing would be required if starting from zero.
Question 4: In a gem retail business, which cost is MOST likely to be variable rather than fixed?
- Monthly showroom rent
- Gemological insurance premium
- Cost of stones purchased for resale (Correct answer)
- Salaried store manager's wages
Correct answer: Cost of stones purchased for resale
The cost of stones purchased for resale rises and falls directly with sales volume, making it a variable cost.
Question 5: A gemologist earns $95,000 in gross revenue, with COGS of $52,000 and operating expenses of $28,000. What is the net operating income?
- $15,000 (Correct answer)
- $43,000
- $67,000
- $23,000
Correct answer: $15,000
Net operating income = $95,000 - $52,000 - $28,000 = $15,000.
Question 6: Which term describes the minimum sales volume at which a gem business neither makes a profit nor incurs a loss?
- Contribution margin
- Break-even point (Correct answer)
- Margin of safety
- Operating leverage
Correct answer: Break-even point
The break-even point is where total revenue equals total costs, resulting in zero profit or loss.
Question 7: A jeweler's inventory turnover ratio is 3.5. What does this suggest about inventory management?
- Inventory sells and is replaced 3.5 times per year (Correct answer)
- The business holds 3.5 months of safety stock
- Gross profit equals 3.5 times the cost of goods
- The business has 3.5 times more assets than liabilities
Correct answer: Inventory sells and is replaced 3.5 times per year
An inventory turnover of 3.5 means the entire inventory is sold and replenished 3.5 times annually.
Gemology Certification Financial Management & Budgeting 3
A gemology studio plans to buy a new spectroscope for $6,000 that will last 5 years with no salvage value.
What is the annual straight-line depreciation?