CVPM Financial Management and Budgeting 3 — Questions and Answers
Question 1: What is the primary purpose of a cash flow forecast in a veterinary practice?
- To determine the practice's net worth
- To predict when the practice may face cash shortages or surpluses (Correct answer)
- To calculate annual tax liability
- To measure profitability relative to competitors
Correct answer: To predict when the practice may face cash shortages or surpluses
A cash flow forecast projects future inflows and outflows to help managers anticipate liquidity needs and plan accordingly.
Question 2: A veterinary practice charges $250 for a dental cleaning. Variable costs are $75 and fixed costs allocated per procedure are $100. What is the contribution margin?
- $75
- $150
- $175 (Correct answer)
- $250
Correct answer: $175
Contribution margin equals revenue minus variable costs: $250 − $75 = $175 per procedure.
Question 3: Which financial document summarizes a practice's revenues, expenses, and net income over a specific time period?
- Balance sheet
- Statement of cash flows
- Income statement (Correct answer)
- Trial balance
Correct answer: Income statement
The income statement (profit and loss statement) reports revenues and expenses over a defined period, resulting in net income or net loss.
Question 4: When a veterinary practice leases equipment rather than purchasing it, which financial impact is most likely?
- Higher depreciation expense on the balance sheet
- Improved short-term cash flow preservation (Correct answer)
- Increased asset ownership on the balance sheet
- Reduced total long-term cost
Correct answer: Improved short-term cash flow preservation
Leasing avoids the large upfront capital outlay of purchasing, preserving cash flow for operational needs in the short term.
Question 5: What does the term 'working capital' represent in a veterinary practice's financial management?
- Total assets minus total liabilities
- Current assets minus current liabilities (Correct answer)
- Cash plus accounts receivable
- Annual revenue minus annual expenses
Correct answer: Current assets minus current liabilities
Working capital is calculated as current assets minus current liabilities and represents the funds available for day-to-day operations.
Question 6: A practice manager notices that drug costs as a percentage of revenue have increased from 18% to 24% over six months. Which action should be investigated first?
- Increasing client fees immediately
- Reviewing inventory control procedures and potential drug diversion (Correct answer)
- Hiring additional pharmacy staff
- Reducing the number of drugs stocked
Correct answer: Reviewing inventory control procedures and potential drug diversion
A significant unexplained increase in drug costs warrants immediate review of inventory controls, ordering practices, and potential theft or diversion.
Question 7: Which type of budget variance occurs when actual revenue is higher than budgeted revenue?
- Unfavorable variance
- Adverse variance
- Favorable variance (Correct answer)
- Neutral variance
Correct answer: Favorable variance
A favorable variance occurs when actual results are better than budgeted — higher revenue or lower costs than planned.
CVPM Financial Management and Budgeting 3
What is the primary purpose of a cash flow forecast in a veterinary practice?