Below you'll find Questions to help you assess your knowledge of finance and budgeting essentials.
1. If you want to recognize the costs connected to a sale during the period when the sale was made, which accounting method would you use?
Ans:
With accrual accounting, costs are matched to the associated sales, regardless of whether cash is actually received or paid in that period. By matching expenses with revenues in the same time period, accrual accounting helps managers understand how profitable a company's products or services are.
2. Which of the following would be considered part of cost of goods sold, or COGS?
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Assembly labor costs are considered part of COGS. Cost of goods sold includes the materials, labor, and other costs that are directly attributable to manufacturing a product or delivering a service.
3. In most accounting systems, short-term or current liabilities are those that must be paid in less than:
Generally, short-term liabilities have to be paid in a year or less. Long-term liabilities stretch out over a longer period and include items such as long-term bonds and mortgages.
4. If the income statement can tell you whether a company is making a profit, what does the cash flow statement tell you?
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The cash flow statement tells you how well a company is turning its profits into cash.
5. Many analysts like to look at a ratio that shows how profitable a company's operating activities are. Which ratio shows this?
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Many analysts use EBIT (earnings before interest and taxes) margin, often known as operating margin, to gauge the profitability of a company's operations.
6. At ABC Company, unit heads develop budgets for their departments that are linked to company performance objectives. Is this top-down or bottom-up budgeting?
Ans:
In top-down budgeting, senior management sets specific performance objectives for individual units. For instance, unit managers may be asked to limit expense growth to no more than 5% over the previous year's expenses. They then develop their budgets within those limits.
7. As you begin to prepare your unit's budget, your manager reminds you to be aware of the "scope" of your budget. What does "scope" mean?
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Scope entails two things: the part of the company your budget is supposed to cover and the level of detail it should include.
8. When you're analyzing ROI, payback period analysis can help you rule out bad investments. What is the main drawback of this method?
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Because payback analysis ignores the time value of money, it does not provide as accurate an economic picture as more sophisticated tools, such as net present value and internal rate of return.
9. Your company is considering making an investment that could enable your division to sell more units of new tracking software introduced last year. Your manager has asked you to determine how many units the company would need to sell to recoup this investment. What analytical method might help you come up with an answer?
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Break-even analysis tells you how much (or how much more) of a product you need to sell in order to pay for a fixed investment- in other words, at what point you will break even financially. You can then use your sales history and knowledge of the market to determine whether the break-even volume is realistic.
10. To track your budget, you carry out three steps on a monthly basis. Step two is missing in the list below; what is it?
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Step two is to compare budgeted figures with actuals and calculate variances. You can then determine to what extent these variances will affect your bottom line.
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