Financial Modeling & Forecasting Flashcards
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Read the first 7 Financial Modeling & Forecasting flashcards as text
A procurement team is evaluating a supplier's financial stability. Which ratio most directly indicates a supplier's short-term liquidity risk?
Answer: Current ratio
The current ratio (current assets ÷ current liabilities) directly measures a supplier's ability to meet short-term obligations with available liquid assets.
When forecasting commodity prices for a procurement budget, a mean reversion model assumes that:
Answer: Prices will eventually return toward their long-run historical average
Mean reversion models assume commodity prices fluctuate around a long-term equilibrium and will 'revert' toward that mean after extreme deviations.
In a procurement cost model, 'should-cost' analysis is used to:
Answer: Estimate what a product or service ought to cost based on its components
Should-cost analysis builds a cost estimate from materials, labor, overhead, and profit to establish a target price and strengthen negotiation positions.
Which of the following best describes 'sensitivity analysis' in the context of a procurement financial model?
Answer: Analyzing how changes in one input variable affect the model's output
Sensitivity analysis systematically varies one input at a time to measure its impact on the output, identifying which assumptions most affect the forecast.
Days Payable Outstanding (DPO) is calculated as:
Answer: (Accounts Payable ÷ COGS) × 365
DPO = (Accounts Payable ÷ COGS) × 365, measuring the average number of days a company takes to pay its suppliers.
A procurement manager is assessing total cost of ownership (TCO). Which cost category is most likely to be underestimated if only the purchase price is considered?
Answer: Transaction processing and administration costs
TCO includes acquisition price plus hidden costs such as ordering, receiving, inspection, defects, and disposal, which are often invisible in the purchase price alone.
In working capital modeling for procurement, extending supplier payment terms from 30 to 60 days primarily affects which financial metric?
Answer: Days Payable Outstanding (DPO)
Extending payment terms directly increases DPO, freeing up cash by delaying outflows to suppliers and improving short-term working capital.