CBC Financial Acumen & Business Finance 1 — Questions and Answers
Question 1: A business coach is helping a client understand their company's financial health. Which financial statement shows the company's revenues, expenses, and net profit over a specific period?
- Balance Sheet
- Income Statement (Correct answer)
- Cash Flow Statement
- Statement of Retained Earnings
Correct answer: Income Statement
The Income Statement (also called Profit & Loss Statement) reports revenues, expenses, and net income over a defined accounting period.
Question 2: When coaching a small business owner, you explain that 'gross profit margin' is best calculated as:
- Net Income / Total Revenue × 100
- (Revenue − Cost of Goods Sold) / Revenue × 100 (Correct answer)
- Operating Income / Total Assets × 100
- (Revenue − Operating Expenses) / Revenue × 100
Correct answer: (Revenue − Cost of Goods Sold) / Revenue × 100
Gross profit margin equals revenue minus cost of goods sold divided by revenue, showing how efficiently a company produces its goods or services.
Question 3: A client's business has a current ratio of 0.8. As their business coach, what should you communicate about this metric?
- The business is highly profitable
- The business may struggle to meet short-term obligations (Correct answer)
- The business has strong long-term solvency
- The business has excellent inventory turnover
Correct answer: The business may struggle to meet short-term obligations
A current ratio below 1.0 indicates current liabilities exceed current assets, signaling potential difficulty paying short-term debts as they come due.
Question 4: Which of the following best describes 'working capital' in a business context?
- Total assets minus total liabilities
- Current assets minus current liabilities (Correct answer)
- Long-term assets minus long-term debt
- Revenue minus all operating expenses
Correct answer: Current assets minus current liabilities
Working capital is calculated as current assets minus current liabilities and measures a company's short-term liquidity and operational efficiency.
Question 5: A business coach helping a client with pricing strategy should explain that 'break-even analysis' determines:
- The point at which total revenue equals total costs, resulting in neither profit nor loss (Correct answer)
- The maximum profit a business can achieve in a quarter
- The ratio of fixed costs to variable costs over time
- The minimum revenue needed to pay employee salaries
Correct answer: The point at which total revenue equals total costs, resulting in neither profit nor loss
Break-even analysis identifies the sales volume at which total revenues equal total costs, meaning the business covers all expenses with zero profit or loss.
Question 6: When coaching an entrepreneur on cash flow management, which statement is most accurate?
- A profitable business always has positive cash flow
- A business can be profitable yet still experience cash flow problems (Correct answer)
- Cash flow and net income are always equal in any given period
- Negative cash flow always indicates a failing business
Correct answer: A business can be profitable yet still experience cash flow problems
A business can show accounting profit yet still face cash shortages due to timing differences between when revenue is earned and when cash is actually received.
Question 7: A client asks about the difference between fixed and variable costs. Which of the following is an example of a variable cost?
- Monthly office rent
- Annual software subscription fee
- Raw materials used per unit produced (Correct answer)
- Salaried employee compensation
Correct answer: Raw materials used per unit produced
Raw materials consumed per unit produced are variable costs because they fluctuate directly in proportion to production or sales volume.
CBC Financial Acumen & Business Finance 1
A business coach is helping a client understand their company's financial health.
Which financial statement shows the company's revenues, expenses, and net profit over a specific period?