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CFM practice questions

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Question 1Operations and Maintenance

In facilities management, which document defines the required performance outcomes for a maintenance contractor without prescribing the exact tasks or staffing levels?

  1. The asset register
  2. The permit-to-work form
  3. The method statement
  4. The output-based service level agreement Correct answer.

Explanation

An output-based service level agreement specifies measurable results such as availability, response times, and cleanliness scores, leaving the contractor to decide how to achieve them. Method statements, permits, and asset registers are operational or informational tools, not performance contracts.

Question 2Operations and Maintenance

A planned maintenance schedule shows a chiller service due in March, but the manufacturer's warranty requires servicing every six months. What is the most appropriate action for the facilities manager?

  1. Cancel the service because the chiller is still operating
  2. Wait until the chiller fails and then claim on the warranty
  3. Adjust the schedule to meet the six-month warranty interval Correct answer.
  4. Defer the service until the warranty expires to save cost

Explanation

Warranty terms are contractual conditions, and missing a required service interval can void coverage. The planned maintenance schedule should be aligned with the more stringent of manufacturer requirements, statutory duties, and risk-based intervals.

Question 3Operations and Maintenance

Which maintenance strategy is most appropriate for a non-critical, low-cost item whose failure has no safety or operational consequence?

  1. Condition-based monitoring
  2. Preventive overhaul
  3. Predictive analytics
  4. Run-to-failure Correct answer.

Explanation

Run-to-failure is a legitimate strategy where the consequences of failure are tolerable and replacement is cheaper than monitoring or planned intervention. Condition monitoring and predictive analytics add cost without proportional benefit for such items.

Question 4Operations and Maintenance

A work order system shows that 40 percent of reactive jobs are repeat visits to the same asset within 30 days. Which performance measure does this most directly indicate?

  1. Asset utilization
  2. Planned maintenance compliance
  3. Mean time to repair
  4. First-time fix rate Correct answer.

Explanation

Repeat visits to the same asset shortly after a repair point to ineffective first-time resolution, which is captured by the first-time fix rate. Mean time to repair measures duration, compliance measures schedule adherence, and utilization measures usage.

Question 5Operations and Maintenance

Under a typical facilities management helpdesk process, what is the purpose of triage when a fault request is received?

  1. To assign a priority and route the request to the correct trade or escalation path Correct answer.
  2. To order spare parts before any diagnosis
  3. To close the work order immediately if the caller is unsure
  4. To invoice the client for the call-out

Explanation

Triage classifies the request by urgency, impact, location, and required skill so it reaches the right resource with an appropriate priority. Closing, ordering parts, and invoicing all occur later in the workflow, if at all.

Question 6Operations and Maintenance

What is the primary purpose of a permit-to-work system in building operations?

  1. To control high-risk work by confirming precautions before work starts Correct answer.
  2. To track energy consumption by zone
  3. To schedule routine cleaning tasks
  4. To record contractor insurance certificates

Explanation

A permit-to-work formalizes authorization for high-risk activities such as hot work or confined-space entry by verifying isolations, precautions, and competence before work begins. It is not an insurance register, cleaning schedule, or energy tool.

Question 7Operations and Maintenance

A facilities manager is comparing corrective maintenance costs against planned maintenance costs over a year. Which analysis best supports a decision to increase planned maintenance on a critical air-handling unit?

  1. Count of work orders raised by each technician
  2. Comparison of contractor hourly rates only
  3. Total cost of ownership comparison including downtime and energy impacts Correct answer.
  4. Review of the asset's purchase price only

Explanation

Decisions on maintenance strategy should weigh total cost of ownership, including repair spend, downtime, energy penalty, and asset life, rather than isolated inputs. Hourly rates, purchase price, and technician counts do not capture the full consequence of failure.

Question 8Operations and Maintenance

A building management system generates a fault alarm for a pump every night at the same time. The maintenance team finds no physical defect on each visit. What is the most appropriate next step?

  1. Review the alarm setpoint and sensor logic for a nuisance condition Correct answer.
  2. Disable the alarm permanently
  3. Replace the pump to eliminate the alarm
  4. Increase the frequency of physical inspections

Explanation

A repeating alarm at a consistent time with no physical defect suggests a nuisance alarm caused by setpoints, sensor drift, or control logic. Investigating the configuration addresses the root cause rather than treating a non-existent fault.

Question 9Operations and Maintenance

A critical generator fails its monthly load test twice in a row. Which action sequence best reflects good maintenance governance?

  1. Ask the cleaning contractor to inspect the fuel line
  2. Record the failure in the log and wait for the next scheduled annual service
  3. Switch the generator to manual mode and continue normal operations
  4. Log the failure, escalate to the responsible manager, and raise a prioritized corrective work order with root-cause investigation Correct answer.

Explanation

Repeated failure of a life-safety asset requires escalation, a prioritized corrective work order, and root-cause investigation to restore assurance. Logging without action or deferring to an annual service leaves a critical risk uncontrolled.

Question 10Operations and Maintenance

Which set of KPIs best measures whether a reactive maintenance service is both responsive and effective?

  1. Response time, repair time, and first-time fix rate Correct answer.
  2. Total spend on spare parts and contractor fees
  3. Number of technicians employed and overtime hours
  4. Building occupancy and energy intensity

Explanation

Responsiveness is captured by response and repair times, while effectiveness is captured by the first-time fix rate. Staffing, spend, occupancy, and energy metrics describe inputs or unrelated outcomes rather than service performance.

Question 11Operations and Maintenance

A contractor's method statement for roof access specifies harness use but omits rescue arrangements. How should the facilities manager respond?

  1. Reject or return the method statement until rescue provision is documented Correct answer.
  2. Accept it provided the contractor signs a disclaimer
  3. Approve the method statement because harnesses are specified
  4. Allow work to proceed if the roof is below ten meters

Explanation

Fall protection is incomplete without a documented rescue plan, since suspension after a fall can be fatal within minutes. The method statement should be returned for revision before work is authorized.

Question 12Operations and Maintenance

During a condition survey, a maintenance engineer records that a pump's vibration readings have risen steadily over three months but remain within alarm limits. What does this trend most likely indicate?

  1. Early-stage bearing or alignment degradation warranting closer monitoring Correct answer.
  2. That the pump has reached end of life
  3. Normal variation requiring no attention
  4. A calibration error in the vibration meter

Explanation

A steady upward trend in vibration, even within limits, is a classic early indicator of developing degradation such as bearing wear or misalignment. Trending supports early intervention before limits are exceeded.

Question 13Operations and Maintenance

What distinguishes a statutory compliance register from a general asset register in building operations?

  1. The compliance register tracks only energy meter readings
  2. The compliance register replaces the need for a maintenance schedule
  3. The compliance register records only assets with legal inspection or testing obligations and their due dates Correct answer.
  4. The compliance register lists all furniture and fittings in the building

Explanation

A statutory compliance register identifies assets and systems subject to legal inspection, testing, or certification, together with their due dates and evidence. It is narrower than an asset register and does not replace maintenance planning.

Question 14Operations and Maintenance

A tenant reports that the temperature in a meeting room is consistently two degrees above setpoint in the afternoon. The BMS shows the valve fully open. Which investigation path is most logical?

  1. Close the valve to test the actuator
  2. Reduce the setpoint by two degrees to compensate
  3. Check cooling capacity, airflow, and sensor placement before adjusting the setpoint Correct answer.
  4. Replace the room thermostat immediately

Explanation

With the valve fully open and the room still warm, the system is failing to meet demand, so capacity, airflow, and sensor location should be verified before any setpoint change. Adjusting the setpoint masks the fault rather than diagnosing it.

Question 15Operations and Maintenance

A facilities team wants to reduce unplanned downtime on a fleet of lifts. Which combination of actions most directly supports that objective?

  1. Increasing the number of complaint forms available in the lobby
  2. Applying risk-based planned maintenance supplemented by condition monitoring and call-out data analysis Correct answer.
  3. Extending service intervals to reduce contractor attendance costs
  4. Relying on passenger reports to trigger all maintenance

Explanation

Risk-based planned maintenance combined with condition monitoring and analysis of call-out history targets the causes of failure before they cause downtime. Reducing interventions or relying solely on complaints increases the likelihood of unplanned outages.

Question 16Operations and Maintenance

A facilities manager must decide whether to repair or replace a 15-year-old boiler with rising repair costs and falling efficiency. Which analysis provides the strongest decision basis?

  1. Comparison of the boiler's original invoice with today's repair quote
  2. The number of complaints received about heating
  3. Life-cycle cost comparison of repair versus replacement including energy, downtime, and residual life Correct answer.
  4. The maintenance technician's personal preference

Explanation

A life-cycle cost comparison captures future energy use, downtime, repair frequency, and remaining asset life, which together determine whether continued repair is economic. Original cost, personal preference, and complaint counts are insufficient on their own.

Question 17Operations and Maintenance

An organization operates a mixed portfolio of owned and leased sites. Which approach best aligns maintenance obligations with contractual and statutory duties across the portfolio?

  1. Delegate all maintenance decisions to individual site occupants
  2. Suspend planned maintenance on leased sites to avoid disputes
  3. Apply one standard maintenance schedule to every site regardless of tenure
  4. Map obligations by tenure, statute, and criticality, then set service levels and evidence requirements for each site Correct answer.

Explanation

Maintenance obligations differ by tenure: leases allocate repairing responsibilities, statutes impose independent duties, and criticality varies by use. Mapping these dimensions allows appropriate service levels and auditable evidence for each site.

Question 18Operations and Maintenance

A root-cause analysis of repeated chiller trips identifies that the primary cause is a control sequence that restarts the compressor too quickly after a stop. Which corrective action addresses the cause rather than the symptom?

  1. Revising the control sequence to enforce an adequate restart delay Correct answer.
  2. Adding a second chiller to share the load
  3. Installing a larger circuit breaker
  4. Resetting the chiller each time it trips

Explanation

The analysis identifies the restart timing in the control sequence as the cause, so revising the sequence addresses it directly. Resetting, upsizing protection, or adding capacity treats symptoms or adds cost without removing the trigger.

Question 19Operations and Maintenance

A maintenance department has high planned maintenance compliance but rising reactive workload on the same assets. Which interpretation is most defensible?

  1. The planned maintenance tasks are being completed but are not effective at preventing the failures Correct answer.
  2. Reactive work should be reclassified as planned to improve the metric
  3. The compliance data must be wrong because compliance and reliability always move together
  4. The assets are simply too old to maintain

Explanation

High compliance with a rising reactive load suggests the maintenance regime itself is inadequate, for example wrong task content or intervals, rather than a scheduling failure. The correct response is to review task effectiveness, not to manipulate reporting.

Question 20Project Management

In facilities project management, which document formally authorizes the project manager to commit organizational resources to a project?

  1. The work breakdown structure
  2. The stakeholder register
  3. The communications management plan
  4. The project charter Correct answer.

Explanation

The project charter is the document issued by the sponsor that formally recognizes the project's existence and grants the project manager authority to apply organizational resources to project activities. Other planning artifacts assume that authority already exists and do not confer it.

Question 21Project Management

A facilities team is replacing a building's chiller. Which sequence correctly orders the project life cycle phases used in most facility capital projects?

  1. Initiating, executing, planning, monitoring and controlling, closing
  2. Initiating, planning, executing, monitoring and controlling, closing Correct answer.
  3. Executing, planning, initiating, monitoring and controlling, closing
  4. Planning, initiating, closing, executing, monitoring and controlling

Explanation

The standard process groups run from initiating through planning, executing, and monitoring and controlling to closing, with monitoring and controlling overlapping the execution work. Planning must follow authorization, and closing is always last.

Question 22Project Management

A project manager is building a work breakdown structure for an office fit-out. Which characteristic must the lowest-level WBS components satisfy?

  1. They map one-to-one to the organizational chart of the contractor
  2. They list every individual task in the schedule network diagram
  3. They describe work packages that can be estimated, scheduled, and assigned to a single owner Correct answer.
  4. They represent cost accounts rather than deliverables

Explanation

The lowest WBS level is the work package, defined so it can be realistically estimated, scheduled, monitored, and assigned to one accountable owner. Schedules and cost accounts are built from work packages, not embedded in the WBS itself.

Question 23Project Management

During a warehouse retrofit, a project manager needs to show the logical order of activities and identify the longest path through the network. Which technique should be used?

  1. Monte Carlo simulation
  2. Earned value analysis
  3. Critical path method Correct answer.
  4. Pareto analysis

Explanation

The critical path method sequences activities through a network and identifies the longest duration path, which determines the shortest possible project duration. Earned value measures performance, Monte Carlo models risk ranges, and Pareto analysis prioritizes causes.

Question 24Project Management

A facilities director wants a single baseline metric showing whether renovation work is ahead of or behind schedule in cost terms. Which earned value measure answers this directly?

  1. Schedule performance index Correct answer.
  2. Estimate at completion
  3. Cost variance
  4. To-complete performance index

Explanation

The schedule performance index equals earned value divided by planned value, so a value above 1.0 indicates more work accomplished than planned. It expresses schedule progress in cost-weighted terms, which is exactly the requested baseline measure.

Question 25Project Management

Which statement accurately describes the purpose of a responsibility assignment matrix in a facilities project?

  1. It documents the lessons learned from prior projects
  2. It links WBS work packages to the people or groups accountable for performing them Correct answer.
  3. It records the approved budget for each cost account
  4. It lists the contractual penalties for late completion

Explanation

A responsibility assignment matrix, such as a RACI chart, cross-references project work with team members or organizational units to clarify who is responsible, accountable, consulted, or informed. It addresses roles and accountability, not budget, penalties, or historical lessons.

Question 26Project Management

A project manager for a hospital wing addition learns that a new fire code takes effect during construction, requiring additional sprinkler zones. The project charter and scope statement contain no such requirement. What is the most appropriate action?

  1. Instruct the subcontractor to proceed and record the work as a schedule variance
  2. Reject the requirement because the scope baseline is already approved
  3. Submit a change request and route it through integrated change control before altering the baseline Correct answer.
  4. Absorb the work into an existing contingency line without documentation

Explanation

A new regulatory requirement that changes scope must be handled through integrated change control so its cost, schedule, and risk impacts are assessed and the baseline is updated only if approved. Directing work without authorization creates uncontrolled scope and invalidates performance measurement.

Question 27Project Management

A chiller replacement project has a budget at completion of 400,000, earned value of 150,000, and actual cost of 180,000 at the reporting date. What is the cost performance index and what does it indicate?

  1. 1.20, meaning the project is under budget
  2. 1.33, meaning the project is ahead of schedule
  3. 0.83, meaning the project is getting less value per unit of cost than planned Correct answer.
  4. 0.94, meaning the project is slightly behind schedule

Explanation

Cost performance index equals earned value divided by actual cost, so 150,000 divided by 180,000 is approximately 0.83. A CPI below 1.0 means each unit of currency spent is buying less completed work than the baseline assumed.

Question 28Project Management

A project manager is classifying stakeholders for a campus utilities upgrade. A regulator has high power over approvals but low current interest in day-to-day progress. Which engagement approach is most appropriate?

  1. Manage the regulator closely with daily detailed reporting
  2. Monitor the regulator with minimal effort and no planned communication
  3. Ignore the regulator until an approval milestone is reached
  4. Keep the regulator satisfied with adequate information and periodic formal updates Correct answer.

Explanation

Stakeholders with high influence but lower interest should be kept satisfied, receiving enough timely and credible information to maintain support without overloading them. Their power over approvals means they cannot be simply monitored.

Question 29Project Management

A project team identifies that a long-lead switchgear delivery is the greatest threat to the commissioning date. Which risk response strategy involves purchasing an insurance policy or warranty to transfer financial consequence?

  1. Avoid
  2. Transfer Correct answer.
  3. Accept
  4. Mitigate

Explanation

Transfer shifts the financial consequence of a risk to a third party, typically through insurance, warranties, or contractual indemnities, though ownership of the risk event itself is not eliminated. Mitigation reduces probability or impact, avoidance changes the plan, and acceptance retains the exposure.

Question 30Project Management

During execution of a laboratory build-out, a key trade contractor falls behind and the float on the critical path is zero. What is the most direct consequence if no corrective action is taken?

  1. Total project cost will remain unchanged regardless of the delay
  2. The critical path will automatically recalculate to a shorter duration
  3. The project completion date will slip by the amount of the delay Correct answer.
  4. The delay will be absorbed by float elsewhere in the network

Explanation

By definition, activities on the critical path have zero total float, so any delay to them translates directly into a delay of the project finish date unless the schedule is compressed or resequenced. Float elsewhere cannot absorb a critical-path delay.

Question 31Project Management

A project manager must estimate the cost of installing a new roof on a building nearly identical to one completed last year. Which estimating approach is most appropriate and why?

  1. Analogous estimating, because historical data from a comparable project provides a quick order-of-magnitude figure Correct answer.
  2. Three-point estimating, because the prior project's actual cost is irrelevant
  3. Parametric estimating, because roof area alone fully determines installed cost
  4. Bottom-up estimating, because every shingle and fastener must be priced individually

Explanation

Analogous estimating uses actual costs from a comparable prior project and is fast and inexpensive, which suits a similar building when detailed design data may not yet be available. It is less accurate than bottom-up methods, so it is typically refined later.

Question 32Project Management

A project manager is preparing a quality management plan for a data center build. Which element ensures that quality is built into the work rather than inspected in afterward?

  1. Scheduling rework as a planned activity in the baseline
  2. Defining acceptance criteria and quality metrics in the plan and verifying them during execution Correct answer.
  3. Relying on the contractor's own internal standards without documented criteria
  4. Concentrating all quality checks in a final walkthrough before handover

Explanation

Assurance-oriented quality management defines measurable acceptance criteria up front and verifies conformance throughout execution, so defects are prevented rather than discovered at the end. Final inspection alone is a control activity that catches problems too late to avoid rework.

Question 33Project Management

A project has a fixed completion date set by a lease expiration. The sponsor asks how much schedule risk remains. Which analysis best answers this?

  1. A stakeholder satisfaction survey
  2. Quantitative schedule risk analysis using simulation to estimate the probability of meeting the date Correct answer.
  3. A review of the resource calendar for holidays
  4. A comparison of the cost baseline to actual cost

Explanation

Quantitative schedule risk analysis, often through Monte Carlo simulation of activity durations and risk events, produces a probability distribution for the completion date. That lets the sponsor see the likelihood of hitting the lease-driven deadline and the contingency needed.

Question 34Project Management

A facilities project manager must procure a specialized elevator modernization package where only two vendors can meet the specification. Which procurement approach is most suitable?

  1. Invitation for bid open to all suppliers with award strictly to the lowest price
  2. Purchase order issued without a statement of work
  3. Request for proposal to the qualified vendors, evaluated on technical approach and price Correct answer.
  4. Sole-source award to the incumbent without competition

Explanation

When the requirement is complex and only a few qualified vendors exist, a request for proposal allows technical approach and price to be evaluated together. Open bidding on price alone is inappropriate for specialized work with a limited supplier pool.

Question 35Project Management

A project team has completed all deliverables, but the client has not yet signed acceptance and outstanding invoices remain. What must occur before the project can be formally closed?

  1. Submit final payment without documenting acceptance
  2. Release all team members immediately and cancel remaining contracts
  3. Begin the next project's planning phase
  4. Obtain formal acceptance, settle outstanding claims and invoices, and archive project records Correct answer.

Explanation

Closing requires formal acceptance of deliverables, resolution of outstanding claims and payments, and archival of project information for future use. Releasing resources or starting new work before these steps leaves the project administratively open.

Question 36Project Management

A project manager calculates that an activity has an early start of day 10, early finish of day 16, late start of day 14, and late finish of day 20. What is the total float and is the activity critical?

  1. 4 days of total float, and the activity is not critical Correct answer.
  2. 10 days of total float, and the activity is not critical
  3. 6 days of total float, and the activity is critical
  4. 0 days of total float, and the activity is critical

Explanation

Total float equals late start minus early start, or 14 minus 10, giving 4 days; the same result comes from late finish minus early finish. Because float is greater than zero, the activity is not on the critical path.

Question 37Project Management

A project is 60 percent complete against a plan of 70 percent, and earned value is 300,000 with planned value of 350,000. The sponsor asks what schedule efficiency the remaining work must achieve to finish on the original schedule. Which measure applies and what does it show?

  1. Cost performance index, which shows the remaining work must be cheaper than planned
  2. Variance at completion, which reports the total cost overrun
  3. Schedule performance index to complete, which requires remaining work to run faster than planned Correct answer.
  4. Estimate at completion, which forecasts the final budget

Explanation

The schedule performance index to complete compares the work remaining against the time remaining, showing the efficiency needed from this point forward to meet the original finish date. With performance behind plan, the remaining work must proceed faster than originally planned.

Question 38Project Management

A project manager observes that a subcontractor's reported progress is consistently more optimistic than site verification shows. Which action best addresses the underlying control weakness?

  1. Establish independent verification of progress and tie payment milestones to verified completion Correct answer.
  2. Increase the reporting frequency without changing how progress is measured
  3. Reduce the contingency reserve to offset the reported progress
  4. Accept the subcontractor's figures to preserve the relationship

Explanation

When reported progress diverges from verified physical accomplishment, the control weakness lies in measurement, so independent verification and payment tied to verified milestones restore data integrity. More frequent reporting of unreliable data does not improve accuracy.

Question 39Finance and Business

Under the CFM exam's treatment of financial statement analysis, a firm reports a current ratio of 2.4 and a quick ratio of 0.9. Which conclusion is most defensible?

  1. Inventory and other less-liquid current assets make up a large share of current liabilities.
  2. The firm has more cash than inventory, so short-term liquidity is strong.
  3. The firm holds substantial inventory or prepaid balances relative to its liquid current assets. Correct answer.
  4. Long-term debt exceeds current assets, indicating solvency risk.

Explanation

The gap between the current ratio (2.4) and the quick ratio (0.9) is explained by the exclusion of inventory and prepaids from the quick ratio numerator. A large gap signals that a meaningful portion of current assets sits in inventory or prepaid items rather than cash and receivables.

Question 40Finance and Business

A company issues a bond at a discount. Under effective interest amortization, how does interest expense behave over the bond's life compared with the cash coupon paid?

  1. Interest expense is lower than the coupon in early periods and rises above it later.
  2. Interest expense exceeds the cash coupon each period as the carrying amount accretes toward par. Correct answer.
  3. Interest expense is recorded only at maturity when the discount is fully recognized.
  4. Interest expense equals the coupon every period because the discount is amortized straight-line.

Explanation

Effective interest expense equals the carrying amount times the market rate, and the carrying amount grows as the discount is amortized. Because the coupon is fixed on par value, expense exceeds the cash coupon throughout the life of a discount bond.

Question 41Finance and Business

In capital budgeting, a project has a positive net present value when discounted at the firm's weighted average cost of capital. What does this most directly imply?

  1. The project generates positive cash flows in every year.
  2. The project's accounting rate of return exceeds the hurdle rate.
  3. The project's payback period is shorter than its useful life.
  4. The project's internal rate of return exceeds the cost of capital. Correct answer.

Explanation

A positive NPV at the WACC discount rate means the discounted cash inflows exceed the initial outlay, which occurs precisely when the IRR is above that discount rate. The two decision rules agree for conventional cash flow patterns.

Question 42Finance and Business

A firm's debt-to-equity ratio rises from 0.5 to 1.0 while total assets stay constant. Which effect on the weighted average cost of capital is most consistent with standard finance theory, holding other factors constant?

  1. WACC is unaffected because total assets did not change.
  2. WACC rises because the cost of equity increases as financial leverage increases. Correct answer.
  3. WACC falls to the after-tax cost of debt because equity is eliminated.
  4. WACC falls because debt is cheaper than equity and the tax shield grows without limit.

Explanation

Higher leverage raises the financial risk borne by shareholders, so the cost of equity rises. Although debt is cheaper, the offsetting increase in the equity cost generally causes WACC to rise once the tax shield benefit is outweighed.

Question 43Finance and Business

Which item is classified as an operating cash flow rather than an investing or financing cash flow in the statement of cash flows?

  1. Cash paid to suppliers for raw materials. Correct answer.
  2. Repayment of principal on a long-term note.
  3. Dividends paid to common shareholders.
  4. Proceeds from the sale of a manufacturing plant.

Explanation

Cash paid to suppliers relates to the day-to-day production and sale of goods, so it belongs in operating activities. Investing activities cover long-term assets, and financing activities cover debt, equity, and dividend transactions.

Question 44Finance and Business

A company uses LIFO during a period of rising prices. Compared with FIFO, which combination of effects is expected?

  1. Higher ending inventory, lower cost of goods sold, higher net income.
  2. Lower ending inventory, higher cost of goods sold, lower net income. Correct answer.
  3. Lower ending inventory, lower cost of goods sold, higher net income.
  4. Higher ending inventory, higher cost of goods sold, lower net income.

Explanation

Under rising prices, LIFO charges the newest, most expensive units to cost of goods sold, raising COGS and lowering net income. The older, cheaper units remain in ending inventory, so inventory is lower than under FIFO.

Question 45Finance and Business

A firm's accounts receivable turnover falls from 8.0 to 6.0 over one year. Which interpretation is most appropriate?

  1. The firm's days sales outstanding has decreased.
  2. The firm has reduced its credit sales relative to its receivables.
  3. The firm collects receivables more quickly than in the prior year.
  4. The firm takes longer on average to collect its receivables. Correct answer.

Explanation

Receivable turnover measures credit sales divided by average receivables, so a lower turnover indicates slower collection. Days sales outstanding, computed as 365 divided by turnover, rises as turnover falls.

Question 46Finance and Business

In a discounted cash flow valuation, which adjustment most directly captures the value of expected synergies in an acquisition?

  1. Reducing the discount rate to the acquirer's cost of debt.
  2. Increasing the terminal growth rate to the long-run inflation rate.
  3. Adding the present value of incremental cash flows expected from combining the firms. Correct answer.
  4. Using the target's standalone free cash flow without modification.

Explanation

Synergies are incremental cash flows that arise only because the two firms combine, so their present value is added to the standalone value. Adjusting the discount rate or terminal growth does not specifically capture synergy cash flows.

Question 47Finance and Business

A company records a warranty liability at the time of sale. This practice best illustrates which accounting principle?

  1. Revenue recognition at the point of delivery.
  2. The full disclosure principle.
  3. The matching principle. Correct answer.
  4. The historical cost principle.

Explanation

Warranty costs are estimated and recorded in the same period as the related sales revenue, which is the essence of matching expenses with revenues. This ensures the income statement reflects the cost of the sale when the revenue is recognized.

Question 48Finance and Business

A firm has a degree of operating leverage of 3.0 and a degree of financial leverage of 1.5. If sales increase by 10 percent, what is the approximate percentage change in net income?

  1. 30 percent
  2. 4.5 percent
  3. 45 percent Correct answer.
  4. 15 percent

Explanation

The degree of combined leverage equals DOL times DFL, or 3.0 times 1.5, which is 4.5. A 10 percent sales increase therefore produces an approximate 45 percent change in net income.

Question 49Finance and Business

Which statement about the time value of money is correct for a given nominal annual rate with more frequent compounding?

  1. The effective annual rate rises as compounding frequency increases. Correct answer.
  2. The effective annual rate equals the nominal rate regardless of frequency.
  3. The effective annual rate falls as compounding frequency increases.
  4. The effective annual rate is unaffected once compounding becomes continuous.

Explanation

More frequent compounding means interest is earned on interest more often, so the effective annual rate exceeds the nominal rate and increases with frequency. It approaches a limit as compounding becomes continuous but does not become unaffected.

Question 50Finance and Business

A company reports net income of 500, depreciation of 80, an increase in accounts receivable of 60, and a decrease in accounts payable of 40. What is cash flow from operations under the indirect method?

  1. 380
  2. 560
  3. 480 Correct answer.
  4. 640

Explanation

Start with net income of 500, add back non-cash depreciation of 80 to get 580, then subtract the receivables increase of 60 and the payables decrease of 40. The result is 480.