Budgeting — CPA BAR practice questions

When a government's legally adopted budget is prepared on a basis other than GAAP (e.g., cash basis), the budgetary comparison schedule should:

1. Present only GAAP-basis actual results, converting the budget figures to a GAAP basis instead
2. Omit any reconciliation and present budget and GAAP actual amounts as if directly comparable
3. Present actual amounts on the budgetary basis used to adopt the budget, with a reconciliation to GAAP-basis amounts when they differ from the fund financial statements
4. Restate the originally adopted budget to eliminate the basis difference entirely

Answer: C — Present actual amounts on the budgetary basis used to adopt the budget, with a reconciliation to GAAP-basis amounts when they differ from the fund financial statements

A) Wrong — converting the budget to GAAP basis is not the required approach; actual results are shown on the budgetary basis. B) Wrong — omitting a needed reconciliation would obscure the basis difference from users. C) Correct — actual results are reported on the budgetary basis with a reconciliation to GAAP-basis amounts provided when the two differ. D) Wrong — the originally adopted budget is not restated to eliminate the basis difference; instead, a reconciliation is provided.

Under ASC 926, revenue from film distribution rights uses:

1. The percentage of completion of the film production
2. The market-based valuation model at each period end
3. The straight-line amortization over the film's life
4. The individual film forecast computation method used

Answer: D — The individual film forecast computation method used

A) Wrong — POC isn't for licensing. D) Correct — individual film forecast method. C) Wrong — nonstandard. B) Wrong — not fair value method.

Zero-based budgeting differs from incremental budgeting because it:

1. Requires only minor adjustments from last year
2. Applies only to capital budgeting decisions
3. Starts from zero and justifies each expense
4. Uses activity-based drivers for allocation

Answer: C — Starts from zero and justifies each expense

A) Wrong — that describes incremental budgeting. B) Wrong — ZBB applies to operating budgets. C) Correct — ZBB starts from zero base each period. D) Wrong — that's ABC, not ZBB.

A make-or-buy analysis focuses on comparing:

1. Total fixed costs of both options for the period
2. Sunk costs of the existing production facility
3. Relevant incremental costs plus opportunity cost
4. Only variable costs of internal production done

Answer: C — Relevant incremental costs plus opportunity cost

A) Wrong — fixed costs alone miss opportunity. B) Wrong — sunk costs are irrelevant. C) Correct — incremental costs + opportunity cost. D) Wrong — must include opportunity cost.

The payback period method's primary weakness is that it:

1. Requires estimation of a discount rate
2. Uses only accounting profit, not cash flow
3. Ignores cash flows beyond the payback date
4. Overweights terminal-value cash flows heavily

Answer: C — Ignores cash flows beyond the payback date

A) Wrong — payback doesn't use discount rates (its flaw). B) Wrong — payback uses cash, not accounting profit. C) Correct — ignores post-payback cash and time value. D) Wrong — terminal values are ignored.

In flexible budget reconciliation, the sales volume variance is best described as the difference between:

1. The static (master) budget and the flexible budget, both evaluated at standard cost/price assumptions but at different volume levels
2. Actual results and the static budget only, with no reference to a flexible budget
3. Actual price and standard price, holding volume constant
4. Two different periods' actual results with no budget comparison at all

Answer: A — The static (master) budget and the flexible budget, both evaluated at standard cost/price assumptions but at different volume levels

A) Correct — the sales volume variance isolates the effect of actual volume differing from budgeted volume by comparing the static budget to the flexible budget, holding price/cost assumptions constant between the two. B) Wrong — that comparison would conflate volume and price/cost effects together. C) Wrong — that describes a price/rate variance, not a volume variance. D) Wrong — the sales volume variance is explicitly a budget-based comparison, not a period-over-period actual results comparison.

Which budgeting approach is MOST associated with continuous, incremental cost-reduction targets built into each period's budget, commonly used in lean manufacturing environments?

1. Kaizen budgeting
2. Zero-based budgeting
3. Static budgeting
4. Rolling forecast

Answer: A — Kaizen budgeting

A) Correct — kaizen budgeting embeds ongoing, incremental cost-reduction targets into each budget cycle, a hallmark of lean environments. B) Wrong — ZBB justifies costs from zero but does not itself impose incremental improvement targets. C) Wrong — a static budget is fixed and does not build in continuous improvement. D) Wrong — a rolling forecast extends the planning horizon but doesn't inherently target cost reduction.

A flexible budget differs from a static budget in that it:

1. Uses only fixed costs, ignoring variable items
2. Is prepared quarterly instead of annually done
3. Adjusts budgeted amounts for actual activity
4. Uses historical data rather than forecasts

Answer: C — Adjusts budgeted amounts for actual activity

A) Wrong — flexible budgets include both cost types. B) Wrong — frequency is not the distinction. C) Correct — flexes with actual volume. D) Wrong — both use forecasts as basis.

The Internal Rate of Return (IRR) is the discount rate at which:

1. Payback period is shortest across scenarios
2. NPV equals the initial investment cost
3. NPV reaches its maximum possible value
4. NPV equals exactly zero for the project

Answer: D — NPV equals exactly zero for the project

D) Correct — IRR is the rate where NPV = 0. B) Wrong — that would mean NPV equals cost. C) Wrong — maximum NPV occurs at lowest discount rate. A) Wrong — payback is unrelated to IRR.

Zero-based budgeting differs from traditional incremental budgeting PRIMARILY because:

1. It only adjusts the prior year's budget for expected inflation
2. It eliminates the need for budget-to-actual variance analysis
3. Each period, every expenditure must be justified from a base of zero rather than starting from the prior year's approved amount
4. It is required under GAAP for all public companies

Answer: C — Each period, every expenditure must be justified from a base of zero rather than starting from the prior year's approved amount

A) Wrong — that describes incremental budgeting, the approach ZBB is contrasted against. C) Correct — ZBB requires each expense to be justified anew from a zero base each period. B) Wrong — variance analysis still applies after a ZBB budget is finalized. D) Wrong — GAAP does not mandate any particular internal budgeting method.

NPV?

Net Present Value. PV of cash inflows - initial investment. Positive NPV = accept.

Payback period?

Time to recover initial investment. Doesn't consider time value.

Scenario analysis?

Best/base/worst case projections. Range of outcomes.

Static vs flexible budget?

Static: fixed at single volume. Flexible: adjusts to actual volume.