Financial Management for Project Managers Accounts Payable/Receivable 4 — Questions and Answers
Question 1: A project manager is reviewing cash flow and notices a large gap between invoiced revenue and collected revenue. Which accounts receivable metric best explains this gap?
- Gross profit margin
- Days sales outstanding (DSO) (Correct answer)
- Return on investment
- Cost performance index
Correct answer: Days sales outstanding (DSO)
DSO quantifies the average number of days between invoicing and cash collection, directly explaining the revenue-to-cash gap.
Question 2: Which of the following best describes a factoring arrangement in accounts receivable?
- Selling receivables to a third party at a discount to receive immediate cash (Correct answer)
- Issuing bonds secured by project receivables
- Allowing customers to pay in installments
- Transferring payables to a sister company
Correct answer: Selling receivables to a third party at a discount to receive immediate cash
Factoring involves selling accounts receivable to a factor (third party) at a discount in exchange for immediate liquidity.
Question 3: What is the risk of having a very high accounts payable balance relative to project expenses?
- It signals excellent vendor relationships
- It may indicate liquidity problems or an inability to pay obligations (Correct answer)
- It reduces the project's need for a contingency reserve
- It improves the project's credit rating
Correct answer: It may indicate liquidity problems or an inability to pay obligations
An unusually high AP balance can signal that the project lacks cash to pay vendors, which may damage vendor relationships and project continuity.
Question 4: A project manager receives an invoice from a subcontractor that exceeds the approved PO by 12%. What is the correct course of action?
- Pay the invoice in full to maintain vendor relations
- Process a change order to authorize the additional amount before approving payment (Correct answer)
- Reject the invoice entirely and terminate the subcontractor
- Split the difference and pay 6% over the PO amount
Correct answer: Process a change order to authorize the additional amount before approving payment
Any amount exceeding the approved PO requires a formal change order to authorize the additional expenditure before payment.
Question 5: Which of the following best describes the difference between cash basis and accrual basis accounting for project receivables?
- Cash basis records revenue when earned; accrual basis records it when cash is received
- Accrual basis records revenue when earned; cash basis records it when cash is received (Correct answer)
- Both methods record revenue at the same time
- Cash basis is only used for government projects
Correct answer: Accrual basis records revenue when earned; cash basis records it when cash is received
Accrual accounting recognizes revenue when earned (work completed), while cash basis only recognizes it when payment is actually received.
Question 6: A project manager wants to assess whether the project can meet its short-term obligations to vendors. Which ratio is most relevant?
- Return on equity
- Debt-to-equity ratio
- Current ratio (Correct answer)
- Internal rate of return
Correct answer: Current ratio
The current ratio (current assets ÷ current liabilities) measures short-term liquidity, including the ability to pay accounts payable.
Question 7: What does a negative accounts payable balance typically indicate in project accounting?
- The project has overpaid a vendor or a duplicate payment has occurred (Correct answer)
- Vendors owe the project money for services rendered
- The project has no outstanding vendor invoices
- The project's budget has been exceeded
Correct answer: The project has overpaid a vendor or a duplicate payment has occurred
A negative AP balance usually means the project has overpaid a vendor, resulting in a credit that the vendor owes back.
Financial Management for Project Managers Accounts Payable/Receivable 4
A project manager is reviewing cash flow and notices a large gap between invoiced revenue and collected revenue.
Which accounts receivable metric best explains this gap?