CAM CAM Financial Management & Budgeting 1 — Questions and Answers
Question 1: Which budgeting method requires managers to justify every expense from zero each budget cycle?
- Incremental budgeting
- Zero-based budgeting (Correct answer)
- Rolling budgeting
- Activity-based budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting requires all expenses to be justified anew each period rather than basing them on prior-year figures.
Question 2: A cost that remains constant regardless of the level of business activity is called a:
- Variable cost
- Semi-variable cost
- Fixed cost (Correct answer)
- Marginal cost
Correct answer: Fixed cost
Fixed costs, such as rent or salaries, do not change with fluctuations in production or service volume.
Question 3: What financial document summarizes an organization's assets, liabilities, and equity at a specific point in time?
- Income statement
- Cash flow statement
- Balance sheet (Correct answer)
- Budget variance report
Correct answer: Balance sheet
The balance sheet provides a snapshot of an organization's financial position on a given date.
Question 4: When actual spending exceeds the budgeted amount for a line item, this is known as a:
- Favorable variance
- Unfavorable variance (Correct answer)
- Budget surplus
- Zero variance
Correct answer: Unfavorable variance
An unfavorable (or adverse) variance occurs when actual costs are higher than budgeted, indicating overspending.
Question 5: Which financial ratio measures an organization's ability to pay short-term obligations using its most liquid assets?
- Debt-to-equity ratio
- Return on investment
- Current ratio
- Quick ratio (Correct answer)
Correct answer: Quick ratio
The quick ratio (acid-test ratio) excludes inventory from current assets, providing a stricter liquidity measure than the current ratio.
Question 6: In capital budgeting, the period required for an investment to generate enough cash flow to recover its initial cost is called the:
- Net present value
- Internal rate of return
- Payback period (Correct answer)
- Depreciation schedule
Correct answer: Payback period
The payback period calculates how long it takes for an investment's cumulative cash inflows to equal its initial outlay.
CAM CAM Financial Management & Budgeting 1
Which budgeting method requires managers to justify every expense from zero each budget cycle?