Financial Management Domain Practice Test

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• If you invest $1,000 today at an annual compound rate of 6% for 3 years, what is the approximate future value?
• Which maturity range applies to Treasury notes?
• Two main components of the master budget?
• 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?
• Which of the following describes the relationship between risk and the discount rate used in capital budgeting?
• As the discount rate increases, what happens to the net present value (NPV) of a project with fixed cash inflows?
• Chapter 7 bankruptcy is commonly known as which of the following?
• What is the primary financing mechanism for early-stage startups that postpones immediate equity dilution?
• Which items are included in the operating budget?
• Treasury notes and bonds are issued in denominations of?
• What is the Economic Order Quantity (EOQ) model used to determine?
• 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?
• GAAP stands for which of the following?
• Differentiate translation exposure and transactional exposure in international finance.
• A net loss occurs when which of the following conditions hold?
• Gearing ratio example: If total debt is $400,000 and total equity is $600,000, what is the gearing ratio?
• What does MM Proposition I with taxes state?
• What is yield to maturity (YTM)?
• Which statement best describes the real option value in capital budgeting?
• FDIC stands for which organization?
• Which document or concept is primarily used to determine a stable and equitable funding plan for anticipated future major common area expenditures?
• What is the future value of 1,000 invested for 5 years at 6% annual return, compounded annually?
• Under the fund method of reporting, members' equity is referred to as what?
• Major improvement expenses are defined as which type of costs?
• Why is the after-tax cost of debt used in WACC?
• What is the main difference between commercial reporting and fund reporting?
• Which statement about Chapter 7 bankruptcy is true?
• What is the future value of an ordinary annuity paying 200 per year for 7 years at 8%?
• How do taxes affect capital budgeting analysis?
• Which statement best describes a reserve cash flow statement?
• Given annual credit sales of $1,200,000 and average accounts receivable of $150,000, calculate DSO (in days) using 365 days year.
• When a CD is reinvested together with its accumulated interest, the ultimate yield will be higher than the stated rate of interest.
• Transaction exposure arises from which of the following?
• Fund reporting method consists of preparing separate columns for which funds?
• 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?
• The phrase component inventory is associated with which budgeting concept?
• Foreclosure is best described as:
• Net income is the amount left after deducting expenses from income. Which option best defines it?
• Payback period: Initial investment $500,000; annual cash inflows $150,000. What is the payback period?
• Which item is excluded from the quick ratio calculation?
• Under the residual theory, if there are no positive-NPV projects, what payout policy results?
• Which expression correctly defines FCFE (free cash flow to equity)?
• Which budget section explicitly excludes the replacement fund?
• WACC is calculated using which of the following components?
• Interest coverage ratio is defined as EBIT divided by interest expense. If EBIT=900,000 and interest=300,000, what is the ratio?
• FCFF represents cash flow available to which claimants?
• Which statement best describes asset turnover?
• In evaluating a project, should sunk costs be included in the cash flow analysis?
• Bad debt write-off involves which action?
• 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?
• Name one major limitation of the payback period method.
• What is a cash budget and why is it essential for liquidity management?
• What does ΔNWC represent in cash flow calculations?
• Which concept explains how debt's interest expense reduces a firm's tax bill?
• What is the basic idea of Value at Risk (VaR)?
• Which term refers to a cash reserve set aside for future replacements?
• In capital budgeting, which cash flows should be included in the analysis?
• If internal funds are insufficient, what is the next preferred financing source in the Pecking Order Theory?
• When hedging currency risk with options, which statement is most accurate regarding flexibility?
• How does risk affect the discount rate used in capital budgeting?
• The equity multiplier in the DuPont framework represents what form of leverage?
• Define operating leverage and financial leverage.
• P/B ratio interpretation: A high price/book value ratio typically indicates what?
• FHLMC is an acronym used in financing discussions. What does it stand for?
• What is Chapter 11 bankruptcy designed to do?
• Write the standard after-tax weighted average cost of capital (WACC) formula.
• What is a major limitation of the payback period criterion?
• 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)?
• What is the frequency of interest payments for Treasury notes and bonds?
• If corporate tax rate Tc increases while debt remains the same, what happens to the after-tax cost of debt in WACC?
• Which statement best describes a balance sheet?
• Investment yield is defined as what?
• Which statement about the relationship between IRR and the discount rate is true?
• Treasury bills are short-term instruments that mature in 13, 26, or 52 week periods. Which statement is true?
• When a lease is classified as a financial lease, what is the typical impact on financial statements?
• In evaluating a project using the profitability index (PI), which of the following is a correct representation of PI and its acceptance criterion?
• Which formula defines the quick 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 goal described by full funding in community finances?
• Discretionary budget line items are typically based on which factor?
• What is an engagement letter in the context of professional services?
• According to the Pecking Order Theory of financing, which source is preferred first by firms?
• Historical trend budgeting is best described as which approach?
• How does financial leverage affect return on equity (ROE)?
• In capital budgeting, what does the real option value represent?
• 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?
• Who prepares the notes to financial statements?
• What is the primary purpose of GAAP?
• Name a common quantitative forecasting method used in FP&A.
• If a PI is 1.10, what percent higher is the present value of inflows compared with the initial investment?
• How is revenue defined in a community association context?
• According to Modigliani-Miles theorem with corporate taxes, how does leverage affect firm value?
• What does EV/EBITDA measure and why is it used?
• Which form of market efficiency is associated with publicly available information?
• What is a real option in project evaluation?
• What does the residual theory of dividend policy state?
• 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)?
• In a DCF valuation, which rate is used to discount the forecast unlevered free cash flows to obtain enterprise value?
• Which statement accurately describes the replacement fund in relation to the operating budget?
• What is the break-even point?
• Name two liquidity ratios and two profitability ratios.
• What does a profitability index (PI) greater than 1 indicate for a project?
• How is the cost of preferred stock calculated?
• Value at Risk (VaR) is best described as...
• The Fair Debt Collection Practices Act requires that the person who owes a debt receive what?
• Why is Depreciation added back in the FCFF formula?
• In zero-based budgeting, what is required for each line item?
• How do ROA and ROE differ in relation to leverage?
• What is a pro forma income statement?
• What is a financial lease and how does it influence reported debt?
• 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 the correct sequence for a DCF valuation?
• Baseline funding is the goal of this funding strategy to keep the reserve cash balance above zero. What does this mean?
• What best defines expenses in the context of community budgeting?
• Which metric is more sensitive to changes in the discount rate: NPV or profitability index?
• In a standard DCF, which type of cash flow is used to determine enterprise value?
• Inventory turnover ratio is COGS divided by average inventory. If COGS = $600,000 and average inventory = $100,000, what is the turnover?
• In a lien situation, which party is primarily protected by the lien's enforcement?
• In Chapter 13 bankruptcy, to whom is the repayment plan submitted for approval?
• Which statement describes NOT being a typical purpose of the replacement fund?
• 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?
• Replacement fund consists of funds set aside for what purpose?
• Which organization buys mortgages from lenders and requires certain types of insurance to be in place?
• Why might a multinational project be evaluated using a country-risk-adjusted discount rate?
• 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?
• Which equation defines FCFE?
• Threshold funding is based on which concept?
• 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 differentiates transaction exposure from translation exposure?
• Name one non-quantitative rationale for a stable dividend policy.
• If the internal rate of return (IRR) of a project is 12% and the required return is 10%, should the project be accepted?
• What is the minimum denomination for Treasury bills?
• In MM with taxes, what term represents the tax shield from debt that increases firm value?
• What is the decision rule for NPV in capital budgeting?
• Why is ethics important in financial management?
• What does the internal rate of return (IRR) represent in capital budgeting?
• In CAPM, the term RM − RF is known as what?
• What is the present value of 1,000 to be received in 5 years at a 6% annual discount rate, compounded annually?
• In the statement of cash flows, which activity includes cash transactions related to borrowing or repaying debt?
• When a Treasury note or bond matures, the buyer receives the full face value. True or False?
• Mergers and acquisitions can create synergies in two primary categories. Which two categories are commonly cited?
• If net income increases while average shareholders' equity remains the same, what happens to ROE?
• Name two common sources of short-term financing for working capital.
• Which statement best describes the value of real options in projects?
• In a chart of accounts, what does the account number primarily help you do?
• Conflicts of interest in finance primarily challenge which ethical principle?
• Using CAPM with risk-free rate 2%, expected market return 8%, and beta 1.2, what is the expected return?
• Which accounting method records income when collected and expenses when paid?
• What is the tax shield effect of debt?
• The operating cycle in days is defined as which of the following?
• What is the replacement fund primarily intended to cover for a community's property?
• 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?
• In the DuPont framework, the equity multiplier captures the effect of which concept?
• What does Interest Rate Parity (IRP) imply about exchange rates and interest rates?
• The cash conversion cycle (CCC) is calculated as DIO + DSO - DPO. If DIO=40 days, DSO=35 days, DPO=25 days, CCC equals?
• 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?
• Translation exposure refers to the impact of currency movements on consolidated financial statements when converting foreign subsidiaries' results to the parent currency.
• An assessment is best described as what?
• How do sensitivity analysis and scenario analysis differ?
• In capital budgeting, why are depreciation methods and tax rate changes relevant?
• Which statement describes a compilation?
• At maturity, what does the holder of a Treasury bill receive?
• Economic Value Added (EVA) is defined as NOPAT minus which cost?
• Acceleration refers to which concept regarding assessments?
• Distinguish between the current ratio and the quick ratio.
• In cash budgeting, what is the purpose of a cash surplus/shortage forecast?
• What does reconciliation of expenses and revenue entail?
• What is the present value of $2,000 to be received in 5 years at an 8% annual discount rate?
• Zero-based budgeting requires what practice?
• What are the three components of ROE in the DuPont analysis?
• In a DCF valuation, what is subtracted from enterprise value to derive equity value?
• If tax rate Tc increases while other variables constant, what happens to WACC?
• Dividend clientele effect refers to which phenomenon?
• Which hedging instrument is standardized and traded on exchanges, typically with daily mark-to-market?
• In CAPM, what does beta measure?
• Which statement about depreciation and tax shields is true?
• P/E ratio interpretation: A high P/E may indicate what?
• Which term best describes non-diversifiable market risk?
• What is the present value of an ordinary annuity paying 200 per year for 7 years at 8%?
• In the Pecking Order Theory, which financing option is considered the last resort?
• In threshold funding, the minimum reserve balance is set as what?
• 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).
• What is the formula for the cash conversion cycle (CCC)?
• Payback period limitation question: which statement best describes its primary limitation?
• What is the primary purpose of an audit?
• FNMA is an acronym used in mortgage programs. What does it stand for?
• In community association accounting, are land and buildings generally shown as assets?
• What is the dividend payout ratio and why is its sustainability important?
• If ROE is 25% and the retention ratio is 0.6, what is the sustainable growth rate g?
• What does CPA stand for?
• What is the quick ratio formula?
• The sustainable growth rate g equals ROE times the retention ratio. If ROE is 20% and retention ratio is 0.4, what is g?
• Which action would increase the sustainable growth rate (g) assuming ROE remains constant?
• Which form of market efficiency claims that prices reflect all past price and volume data?
• What is the role of the FDIC?
• Which inputs are used in the CAPM example?
• ROE stands for?
• Who performs an audit of an organization's financial records?
• 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 are synergies in an acquisition, and why are they important?
• In the commercial reporting method, how are operating and reserve activities presented?
• Personal money judgment refers to:
• Which statement best describes the dividend clientele effect?
• Notes to financial statements are prepared by which party?
• What is an option's intrinsic value for a call option with strike K and current stock price S?
• What does FHA stand for in the context of community associations?
• Which of the following best describes liabilities in financial reporting?
• Which bankruptcy chapter is designed to reorganize a corporation to continue operations?
• If a bond trades at a premium, which statement is true about its yield relative to its coupon rate?
• Residual dividend theory suggests dividends should be paid only after funding what?
• Which measure describes the maximum potential loss at a given confidence level over a defined horizon?
• Which metric measures the average time to collect receivables?
• In the static trade-off theory of capital structure, the optimal debt level occurs where which two components balance?
• Which statement best explains why ROE can exceed ROA?
• Which accounting method records income when it is earned and expenses when incurred?
• Which statement describes the reserve cash flow statement?
• What does DSO measure?
• Which budget category includes the cash budget and pro forma statements?
• Which factor would justify a higher P/E ratio?
• Which expression defines FCFF?
• DuPont analysis decomposes ROE into which three components?
• In currency risk management, which strategy is a natural hedge?
• How does a forward contract hedge currency risk?
• Which budgeting approach is characterized by starting from zero for each item and justifying allocations?
• What is the primary distinction between debt and equity financing from a control perspective?
• ROE is defined as which ratio?
• Revenue in a community association context is primarily used to cover what?
• In EVA, what is the capital charge subtracted from NOPAT?
• What is the purpose of a reserve study?
• How does a higher credit rating affect the yield demanded by investors?
• Which of the following are examples of investments as defined in the material?
• Which agency regulates and influences insurance requirements and upkeep standards for community associations?
• Which set of fund categories is represented in the fund reporting method?
• Which of the following is NOT listed as an example of investments?
• 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?
• Which statement best defines the gearing ratio?
• A lien is defined as:
• Operating expenses are best described as which of the following?