Financial Management Domain Practice Test

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• In zero-based budgeting, what is required for each line item?
• If the PV of inflows is $1,100,000 and the initial investment is $1,000,000, what is the net present value (NPV) of the project?
• Bad debt write-off involves which action?
• What is the present value of 1,000 to be received in 5 years at a 6% annual discount rate, compounded annually?
• Which set of fund categories is represented in the fund reporting method?
• Which statement best describes the real option value in capital budgeting?
• Which budget section explicitly excludes the replacement fund?
• Who prepares the notes to financial statements?
• Operating expenses are best described as which of the following?
• What is the replacement fund primarily intended to cover for a community's property?
• The cash conversion cycle (CCC) is calculated as DIO + DSO - DPO. If DIO=40 days, DSO=35 days, DPO=25 days, CCC equals?
• What is the primary purpose of an audit?
• Translation exposure refers to the impact of currency movements on consolidated financial statements when converting foreign subsidiaries' results to the parent currency.
• In a standard DCF, which type of cash flow is used to determine enterprise value?
• In currency risk management, which strategy is a natural hedge?
• Who performs an audit of an organization's financial records?
• Why might a multinational project be evaluated using a country-risk-adjusted discount rate?
• Which statement best describes asset turnover?
• How does a forward contract hedge currency risk?
• The phrase component inventory is associated with which budgeting concept?
• Notes to financial statements accompany the CPA-prepared financial statements and provide additional information to help readers understand the association's financial situation. What is their purpose?
• When hedging currency risk with options, which statement is most accurate regarding flexibility?
• Which statement best explains why ROE can exceed ROA?
• In the Pecking Order Theory, which financing option is considered the last resort?
• What is the minimum denomination for Treasury bills?
• Which statement about the relationship between IRR and the discount rate is true?
• Modified cash basis accounting records income and expenses on a cash basis with selected items recorded on an accrual basis. Which statement describes this method?
• What is the decision rule for NPV in capital budgeting?
• Chapter 7 bankruptcy is commonly known as which of the following?
• Interest coverage ratio is defined as EBIT divided by interest expense. If EBIT=900,000 and interest=300,000, what is the ratio?
• Notes to financial statements are prepared by which party?
• Which inputs are used in the CAPM example?
• What does a profitability index (PI) greater than 1 indicate for a project?
• Which statement describes the reserve cash flow statement?
• What is the correct sequence for a DCF valuation?
• Under the fund method of reporting, members' equity is referred to as what?
• Which form of market efficiency claims that prices reflect all past price and volume data?
• What is the frequency of interest payments for Treasury notes and bonds?
• If forecasted sales next year are $1,000,000, gross margin is 25%, and operating expenses are 15% of sales, what is forecasted operating income?
• What is a financial lease and how does it influence reported debt?
• What is the role of the FDIC?
• The Fair Debt Collection Practices Act requires that the person who owes a debt receive what?
• What is Chapter 11 bankruptcy designed to do?
• How is revenue defined in a community association context?
• What are synergies in an acquisition, and why are they important?
• Which statement describes NOT being a typical purpose of the replacement fund?
• What is the tax shield effect of debt?
• How do sensitivity analysis and scenario analysis differ?
• If net income increases while average shareholders' equity remains the same, what happens to ROE?
• Inventory turnover ratio is COGS divided by average inventory. If COGS = $600,000 and average inventory = $100,000, what is the turnover?
• A lien is defined as:
• If corporate tax rate Tc increases while debt remains the same, what happens to the after-tax cost of debt in WACC?
• Name two liquidity ratios and two profitability ratios.
• Which document or concept is primarily used to determine a stable and equitable funding plan for anticipated future major common area expenditures?
• Which of the following are examples of investments as defined in the material?
• How does risk affect the discount rate used in capital budgeting?
• Net income is the amount left after deducting expenses from income. Which option best defines it?
• GAAP stands for which of the following?
• Which item is excluded from the quick ratio calculation?
• Which statement best describes the dividend clientele effect?
• What are the three components of ROE in the DuPont analysis?
• Which factor would justify a higher P/E ratio?
• Chart of accounts is an organized list of titles, descriptions and assigned numbers of all accounts in an organization's general ledger. The assigned number helps you locate the account. The title describes the purpose of the account. What is the chart of accounts primarily used for?
• What is the primary purpose of GAAP?
• In a DCF valuation, which rate is used to discount the forecast unlevered free cash flows to obtain enterprise value?
• The Economic Order Quantity (EOQ) formula is Q* = sqrt(2DS/H). If D=10,000 units/year, S=$200 per order, and annual holding cost per unit H=$2, what is EOQ (approximately)?
• Name a common quantitative forecasting method used in FP&A.
• Which accounting method records income when collected and expenses when paid?
• Under the residual theory, if there are no positive-NPV projects, what payout policy results?
• Personal money judgment refers to:
• Treasury bills are short-term instruments that mature in 13, 26, or 52 week periods. Which statement is true?
• Which metric measures the average time to collect receivables?
• In evaluating a project using the profitability index (PI), which of the following is a correct representation of PI and its acceptance criterion?
• P/E ratio interpretation: A high P/E may indicate what?
• When a Treasury note or bond matures, the buyer receives the full face value. True or False?
• What is the basic idea of Value at Risk (VaR)?
• In community association accounting, are land and buildings generally shown as assets?
• Acceleration refers to which concept regarding assessments?
• Which of the following describes the relationship between risk and the discount rate used in capital budgeting?
• Which accounting method records income when it is earned and expenses when incurred?
• Distinguish between the current ratio and the quick ratio.
• Define operating leverage and financial leverage.
• DuPont analysis decomposes ROE into which three components?
• How is the cost of preferred stock calculated?
• What is the quick ratio formula?
• How does a higher credit rating affect the yield demanded by investors?
• In capital budgeting, why are depreciation methods and tax rate changes relevant?
• Which metric is more sensitive to changes in the discount rate: NPV or profitability index?
• What does MM Proposition I with taxes state?
• In evaluating a project, should sunk costs be included in the cash flow analysis?
• In cash budgeting, what is the purpose of a cash surplus/shortage forecast?
• After-tax cost of debt is calculated as r_d*(1 - tax rate). If pre-tax cost of debt is 8% and tax rate is 30%, what is the after-tax cost?
• Which term best describes non-diversifiable market risk?
• The equity multiplier in the DuPont framework represents what form of leverage?
• Conflicts of interest in finance primarily challenge which ethical principle?
• If ROE is 25% and the retention ratio is 0.6, what is the sustainable growth rate g?
• What is the primary distinction between debt and equity financing from a control perspective?
• In the DuPont framework, the equity multiplier captures the effect of which concept?
• Which equation defines FCFE?
• In a DCF valuation, what is subtracted from enterprise value to derive equity value?
• WACC is calculated using which of the following components?
• P/B ratio interpretation: A high price/book value ratio typically indicates what?
• ROE stands for?
• At maturity, what does the holder of a Treasury bill receive?
• In the static trade-off theory of capital structure, the optimal debt level occurs where which two components balance?
• When a CD is reinvested together with its accumulated interest, the ultimate yield will be higher than the stated rate of interest.
• As the discount rate increases, what happens to the net present value (NPV) of a project with fixed cash inflows?
• In a chart of accounts, what does the account number primarily help you do?
• Which action would increase the sustainable growth rate (g) assuming ROE remains constant?
• Which organization buys mortgages from lenders and requires certain types of insurance to be in place?
• According to Modigliani-Miles theorem with corporate taxes, how does leverage affect firm value?
• Economic Value Added (EVA) is defined as NOPAT minus which cost?
• Historical trend budgeting is best described as which approach?
• Which bankruptcy chapter is designed to reorganize a corporation to continue operations?
• Value at Risk (VaR) is best described as...
• What does reconciliation of expenses and revenue entail?
• Which of the following is NOT listed as an example of investments?
• What is the present value of $2,000 to be received in 5 years at an 8% annual discount rate?
• If a PI is 1.10, what percent higher is the present value of inflows compared with the initial investment?
• Which budgeting approach is characterized by starting from zero for each item and justifying allocations?
• What does ΔNWC represent in cash flow calculations?
• Replacement fund consists of funds set aside for what purpose?
• In CAPM, the term RM − RF is known as what?
• Which statement best describes a reserve cash flow statement?
• Which statement accurately describes the replacement fund in relation to the operating budget?
• Threshold funding is based on which concept?
• Which maturity range applies to Treasury notes?
• Which concept explains how debt's interest expense reduces a firm's tax bill?
• Which statement best describes a balance sheet?
• What is an engagement letter in the context of professional services?
• Which statement differentiates transaction exposure from translation exposure?
• Which formula defines the quick ratio?
• FCFF represents cash flow available to which claimants?
• Which term refers to a cash reserve set aside for future replacements?
• In CAPM, what does beta measure?
• A 10-year bond has an annual coupon of 8% and face value $1,000. If the yield to maturity is 6%, what is the approximate price of the bond?
• Gearing ratio example: If total debt is $400,000 and total equity is $600,000, what is the gearing ratio?
• Write the standard after-tax weighted average cost of capital (WACC) formula.
• If tax rate Tc increases while other variables constant, what happens to WACC?
• A representation letter is a letter from the CPA that states that the information the community association provides is true to the best of its knowledge. What is this letter?
• What does FHA stand for in the context of community associations?
• What is the main difference between commercial reporting and fund reporting?
• Using CAPM with risk-free rate 2%, expected market return 8%, and beta 1.2, what is the expected return?
• Why is the after-tax cost of debt used in WACC?
• Transaction exposure arises from which of the following?
• Which statement describes a compilation?
• FNMA is an acronym used in mortgage programs. What does it stand for?
• In capital budgeting, which cash flows should be included in the analysis?
• Which statement about depreciation and tax shields is true?
• How do ROA and ROE differ in relation to leverage?
• The statement of cash flows summarizes the flow of funds into and out of the community association, including normal operations, investment activities, and borrowing activities. Which activities are shown?
• If the internal rate of return (IRR) of a project is 12% and the required return is 10%, should the project be accepted?
• Major improvement expenses are defined as which type of costs?
• An assessment is best described as what?
• A project requires an initial investment of $1,000,000 and has a PV of inflows of $1,100,000 at the required rate. What is the profitability index (PI)?
• What is a cash budget and why is it essential for liquidity management?
• Differentiate translation exposure and transactional exposure in international finance.
• In threshold funding, the minimum reserve balance is set as what?
• Foreclosure is best described as:
• Which of the following best describes liabilities in financial reporting?
• Mergers and acquisitions can create synergies in two primary categories. Which two categories are commonly cited?
• ROE is defined as which ratio?
• Which form of market efficiency is associated with publicly available information?
• What is the purpose of a reserve study?
• In the statement of cash flows, which activity includes cash transactions related to borrowing or repaying debt?
• If net profit margin is 4%, asset turnover is 1.8, and equity multiplier is 1.6, what is ROE according to the DuPont formula?
• A firm finances with 60% equity at 12% cost and 40% debt with 6% pre-tax cost and 30% tax rate. Compute the weighted average cost of capital (WACC).
• In Chapter 13 bankruptcy, to whom is the repayment plan submitted for approval?
• According to the Pecking Order Theory of financing, which source is preferred first by firms?
• Which agency regulates and influences insurance requirements and upkeep standards for community associations?
• Which items are included in the operating budget?
• What is the future value of an ordinary annuity paying 200 per year for 7 years at 8%?
• What does EV/EBITDA measure and why is it used?
• Which expression correctly defines FCFE (free cash flow to equity)?
• What is the Economic Order Quantity (EOQ) model used to determine?
• The statement of income and expense records the community association's financial transactions during a given period, typically for a month plus the fiscal year to date. Over what period does it cover?
• What is a major limitation of the payback period criterion?
• Which measure describes the maximum potential loss at a given confidence level over a defined horizon?
• When a lease is classified as a financial lease, what is the typical impact on financial statements?
• What is a pro forma income statement?
• Why is ethics important in financial management?
• Fund reporting method consists of preparing separate columns for which funds?
• What is the primary financing mechanism for early-stage startups that postpones immediate equity dilution?
• FDIC stands for which organization?
• What is the goal described by full funding in community finances?
• The sustainable growth rate g equals ROE times the retention ratio. If ROE is 20% and retention ratio is 0.4, what is g?
• What is the break-even point?
• In the commercial reporting method, how are operating and reserve activities presented?
• What best defines expenses in the context of community budgeting?
• What is the future value of 1,000 invested for 5 years at 6% annual return, compounded annually?
• How does financial leverage affect return on equity (ROE)?
• Residual dividend theory suggests dividends should be paid only after funding what?
• The operating cycle in days is defined as which of the following?
• What does DSO measure?
• What is yield to maturity (YTM)?
• Quick ratio is defined as (Cash + Marketable securities + Accounts receivable) divided by current liabilities. If cash $50k, AR $150k, current liabilities $180k, what is the quick ratio?
• Payback period limitation question: which statement best describes its primary limitation?
• Given annual credit sales of $1,200,000 and average accounts receivable of $150,000, calculate DSO (in days) using 365 days year.
• Which statement about Chapter 7 bankruptcy is true?
• Which statement best describes the value of real options in projects?
• If internal funds are insufficient, what is the next preferred financing source in the Pecking Order Theory?
• In EVA, what is the capital charge subtracted from NOPAT?
• Name one major limitation of the payback period method.
• In capital budgeting, what does the real option value represent?
• What is the dividend payout ratio and why is its sustainability important?
• Dividend clientele effect refers to which phenomenon?
• Which expression defines FCFF?
• Name two common sources of short-term financing for working capital.
• Revenue in a community association context is primarily used to cover what?
• Name one non-quantitative rationale for a stable dividend policy.
• What is the formula for the cash conversion cycle (CCC)?
• Treasury notes and bonds are issued in denominations of?
• Why is Depreciation added back in the FCFF formula?
• In a lien situation, which party is primarily protected by the lien's enforcement?
• What does the internal rate of return (IRR) represent in capital budgeting?
• What is a real option in project evaluation?
• If a bond trades at a premium, which statement is true about its yield relative to its coupon rate?
• Which budget category includes the cash budget and pro forma statements?
• In MM with taxes, what term represents the tax shield from debt that increases firm value?
• Chapter 13 bankruptcy is used to reorganize personal or non-corporate debt. A plan is submitted to a judge for paying off all or nearly all of the debt over a specified period of time. Which statement best summarizes its purpose?
• What does the residual theory of dividend policy state?
• How do taxes affect capital budgeting analysis?
• Discretionary budget line items are typically based on which factor?
• What is an option's intrinsic value for a call option with strike K and current stock price S?
• Payback period: Initial investment $500,000; annual cash inflows $150,000. What is the payback period?
• A net loss occurs when which of the following conditions hold?
• What does Interest Rate Parity (IRP) imply about exchange rates and interest rates?
• A project requires an initial investment of $500,000 and generates cash inflows of $120,000 per year for 7 years. What is the net present value at a 9% discount rate?
• Which statement best defines the gearing ratio?
• Baseline funding is the goal of this funding strategy to keep the reserve cash balance above zero. What does this mean?
• Which hedging instrument is standardized and traded on exchanges, typically with daily mark-to-market?
• Two main components of the master budget?
• What is the present value of an ordinary annuity paying 200 per year for 7 years at 8%?
• FHLMC is an acronym used in financing discussions. What does it stand for?
• Zero-based budgeting requires what practice?
• What does CPA stand for?
• Investment yield is defined as what?