CPA Quiz: Forecast Revenues And Expenses
20 questions · exam conditions
0:00
Forecast Revenues And ExpensesQuestion 1 of 20

Revenue $500,000, variable costs $300,000, fixed costs $120,000. Sales up 10%, all costs up 8%. Forecast profit?

$80,000
$96,400
$88,000
$130,000
← Back to quizzes

CPA Quiz

CPA Quiz: Forecast Revenues And Expenses

Practice Forecast Revenues And Expenses in CPA with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Forecast Revenues And Expenses, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

Revenue $500,000, variable costs $300,000, fixed costs $120,000. Sales up 10%, all costs up 8%. Forecast profit?

  1. $80,000
  2. $96,400 (correct answer)
  3. $88,000
  4. $130,000
Explanation: Sales become 550,000. Variable costs become 324,000 and fixed costs become 129,600, so total costs are 453,600. Forecast profit is 550,000 - 453,600 = 96,400. The tempting $88,000 just grows the old $80,000 profit by 10% and ignores the 8% cost increase.

Question 2

Sales volume: 1,000 units (30% chance) or 1,500 units (70%). Unit price $20. Expected revenue?

  1. $24,000
  2. $25,000
  3. $26,000
  4. $27,000 (correct answer)
Explanation: Expected volume is 0.3(1,000) + 0.7(1,500) = 1,350 units. At $20 per unit, 1,350 x 20 = $27,000. A tempting wrong answer is $25,000, which uses the simple average of 1,000 and 1,500 units and ignores the 30% and 70% probabilities.

Question 3

Flexible budget formula: $20,000 fixed plus $4 per unit. Static volume 8,000; actual 9,000. Budgeted expense?

  1. $32,000
  2. $36,000
  3. $52,000
  4. $56,000 (correct answer)
Explanation: Start with the fixed $20,000, then add $4 per unit at the actual volume of 9,000 units: $36,000. Total budgeted expense is $56,000. The tempting error is using static volume of 8,000 units, which gives only $52,000, but a flexible budget adjusts to actual activity.

Question 4

Budgeted sales: May $80,000, June $100,000. Cash collected 40% in sale month, 60% next month. June receipts?

  1. $88,000 (correct answer)
  2. $92,000
  3. $100,000
  4. $80,000
Explanation: June receipts are 40% of June sales plus 60% of May sales: 40,000 + 48,000 = 88,000. The tempting $100,000 is wrong because it ignores the 60% of May sales collected in June.

Question 5

Costs: $90,000 at 20,000 units; $120,000 at 30,000 units. Forecast total cost at 24,000 units?

  1. $72,000
  2. $90,000
  3. $96,000
  4. $102,000 (correct answer)
Explanation: Using high-low method, variable cost per unit is (120,000 - 90,000) / (30,000 - 20,000) = 3. Fixed cost is 90,000 - (3 x 20,000) = 30,000. At 24,000 units, total cost is 30,000 + (3 x 24,000) = 102,000. The tempting $96,000 comes from using $4 per unit at 30,000 units, which ignores the fixed cost component.

Question 6

A company forecasts expenses as: variable manufacturing 45% of revenue, variable selling 6% of revenue, fixed overhead $800,000, fixed SGA $1,200,000. Forecasted revenue is $8,000,000. What are total forecasted expenses?

  1. $5,280,000
  2. $6,480,000
  3. $5,680,000
  4. $6,080,000 (correct answer)
Explanation: Total variable costs = (45% + 6%) x $8,000,000 = 51% x $8,000,000 = $4,080,000. Total fixed costs = $800,000 + $1,200,000 = $2,000,000. Total expenses = $4,080,000 + $2,000,000 = $6,080,000. Option A omits fixed overhead. Option B applies a higher variable percentage. Option C uses only one fixed cost component.

Question 7

Using the expense forecast from the prior question (variable costs 51% of revenue, fixed costs $2,000,000) with revenue of $8,000,000, what is forecasted operating income?

  1. $1,920,000 (correct answer)
  2. $2,720,000
  3. $1,120,000
  4. $3,920,000
Explanation: Contribution margin = $8,000,000 x (1 - 0.51) = $8,000,000 x 0.49 = $3,920,000. Operating income = $3,920,000 - $2,000,000 = $1,920,000. Option B omits variable selling expenses from the variable cost ratio. Option C uses an incorrect fixed cost total. Option D reports contribution margin before fixed costs rather than operating income.

Question 8

A company forecasts: 15% revenue growth from last year's $6,000,000; COGS remaining at 58% of revenue; SGA increasing by $200,000 from last year's $900,000; depreciation unchanged at $300,000. What is forecasted operating income?

  1. $1,398,000
  2. $1,498,000 (correct answer)
  3. $1,598,000
  4. $1,698,000
Explanation: Forecasted revenue = $6,000,000 x 1.15 = $6,900,000. COGS = $6,900,000 x 58% = $4,002,000. Gross profit = $6,900,000 - $4,002,000 = $2,898,000. SGA = $900,000 + $200,000 = $1,100,000. Operating income = $2,898,000 - $1,100,000 - $300,000 = $1,498,000. Option A uses an incorrect COGS percentage. Option C omits the SGA increase. Option D applies SGA as a percentage of new revenue rather than adding the fixed increment.

Question 9

A pro forma income statement assumes: revenue $10,000,000 (COGS 55% of revenue, gross profit $4,500,000), fixed SGA $1,800,000, fixed depreciation $400,000, fixed interest expense $200,000, and a 25% tax rate. What is forecasted net income?

  1. $1,575,000 (correct answer)
  2. $1,725,000
  3. $2,100,000
  4. $1,425,000
Explanation: EBIT = Gross profit - SGA - Depreciation = $4,500,000 - $1,800,000 - $400,000 = $2,300,000. EBT = $2,300,000 - $200,000 = $2,100,000. Net income = $2,100,000 x (1 - 0.25) = $1,575,000. Option B applies a 25% tax rate to an incorrect EBT. Option C is EBT before taxes. Option D applies a higher tax rate.

Question 10

A company forecasts revenue by extrapolating a three-year historical growth rate of 20% per year. Industry analysts project the market will grow 4% next year. Which concern is most relevant to this revenue forecast?

  1. Extrapolating historical trends is always the most accurate method for revenue forecasting
  2. Growing 20% in a 4%-growth market requires continuous market share capture; the forecast should be validated against specific competitive advantages and the realistic scope for further market share gains (correct answer)
  3. The company's forecast should be reduced to match the 4% market growth rate
  4. Revenue forecasts should never be set above the industry market growth rate
Explanation: A company growing at 20% in a 4% market must be capturing market share at approximately 16 percentage points annually. This is analytically unusual and unsustainable without specific, identifiable competitive advantages. The forecast should be stress-tested: what share gains are implied, are they achievable given competitive dynamics, and at what point does share capture become implausible? Option A treats trend extrapolation as automatically valid. Option C replaces the company-specific estimate with the market rate without analysis. Option D makes an absolute rule that ignores legitimate above-market growth cases.

Question 11

A company uses the percentage-of-sales method for all expense line items, including fixed overhead (long-term leases and depreciation on recently purchased equipment). Which concern does this approach create?

  1. The percentage-of-sales method is always accurate regardless of the cost structure
  2. Projecting fixed costs as variable incorrectly forecasts them as declining when revenue falls; the model will overstate profitability in downside revenue scenarios because the cost reductions it implies will not actually occur (correct answer)
  3. Fixed costs should be excluded entirely from expense forecasts
  4. Depreciation and lease obligations are non-cash and should not be included in expense forecasts
Explanation: Applying the percentage-of-sales method to fixed costs converts them into variable costs for forecasting purposes. If revenue declines 20%, the model will forecast a proportional reduction in lease and depreciation expenses - but these costs are contractually fixed and will not decline. This produces an overstated profit forecast in the downside scenario. Fixed costs should be modeled separately at their committed amounts, while variable costs use the percentage-of-sales method. Option A ignores the model error. Option C is incorrect; fixed costs must be included. Option D incorrectly suggests non-cash items be excluded from expense forecasts.

Question 12

A company's prior-year accounts payable was $900,000 (DPO of 55 days) based on COGS of $6,000,000. The forecast uses a target DPO of 45 days against the same projected COGS. Which concern is most relevant to this assumption?

  1. The 45-day target payables balance is higher than last year, so the company is extending payment terms favorably
  2. Reducing DPO to 45 days will release working capital and always improves the cash position
  3. Moving from 55-day to 45-day DPO implies paying suppliers faster, which uses more cash; the forecast should explicitly model the cash outflow impact, or explain why a faster payment assumption is appropriate (correct answer)
  4. DPO assumptions are irrelevant to the cash flow forecast because accounts payable is a non-cash balance sheet item
Explanation: Forecasted AP at 45 days = $6,000,000 x (45/365) = approximately $740,000, compared to $900,000 currently. This $160,000 reduction in AP represents cash that flows out to suppliers faster than before. If the company is currently paying in 55 days but the forecast assumes 45 days, the model must either explain why the company plans to accelerate payments (a deliberate strategic choice) or acknowledge that this is an aspirational assumption that may not materialize. Option A is incorrect; 45 days is shorter (not longer) than 55 days. Option B mischaracterizes a payables reduction as releasing working capital - it actually consumes cash. Option D is incorrect; changes in AP directly affect cash flow.

Question 13

A 12-month moving average revenue forecast includes two months of revenue from a new product line launched in Month 10, contributing $400,000 in those two months. The analyst uses all 12 months as the base. Which concern does this approach raise?

  1. A 12-month moving average base is too short and should be extended to 24 months
  2. The new product revenue should be excluded because it is non-recurring
  3. Including only 2 of the 12 months of new product revenue significantly understates the forward run rate; the forecast should be adjusted to reflect the full annualized contribution of the new product line (correct answer)
  4. Moving average methods are unsuitable for any company with new product launches
Explanation: A moving average that includes a new product for only 2 of 12 months will embed only one-sixth of the product's run-rate contribution into the forecast. If the new product generated $400,000 in two months, its annualized run rate is approximately $2,400,000 - but the 12-month average smooths this into a far smaller contribution. The forecast should explicitly account for the full forward impact of the new product rather than relying on an averaging method that dilutes recent structural changes. Option B incorrectly labels recurring new product revenue as non-recurring. Option D overgeneralizes from one limitation.

Question 14

A company's revenue forecast assumes a 15% increase driven entirely by price increases in a highly competitive, commoditized market. Which concern is most significant?

  1. Price increases always generate proportional revenue growth regardless of competitive dynamics
  2. A 15% price increase is modest and achievable in any industry
  3. Revenue forecasts should never include price increase assumptions because they are too uncertain
  4. In a commoditized competitive market, a 15% price increase risks significant volume loss to competitors; the forecast should model the volume response to the price change rather than assuming revenue rises proportionally (correct answer)
Explanation: In a commoditized market where customers can switch easily between suppliers, a 15% price increase is likely to trigger substantial volume loss. Price elasticity determines whether the revenue impact is positive or negative; in a highly competitive commodity environment, demand is typically elastic and large price increases result in lower total revenue. The forecast should model expected volume at the new price and test the combined revenue impact. Option A ignores price elasticity. Option B makes an unsupported claim that 15% is universally modest. Option C goes too far in prohibiting price assumptions entirely.

Question 15

A company uses a three-period simple moving average to forecast monthly sales. The past three months were: Month 1 $420,000, Month 2 $450,000, Month 3 $390,000. What is the moving average forecast for Month 4?

  1. $420,000 (correct answer)
  2. $450,000
  3. $390,000
  4. $430,000
Explanation: Simple moving average = ($420,000 + $450,000 + $390,000) / 3 = $1,260,000 / 3 = $420,000. The three-period average smooths out fluctuations by giving equal weight to each of the three most recent observations. Option B is the highest single-period value. Option C is the most recent period's actual sales. Option D applies unequal weights to the three periods.

Question 16

A regression analysis produces the equation: Revenue = 1,200,000+(1,200,000 + (45,000 x Number of salespeople). The company currently has 20 salespeople and plans to hire 8 more. What is the forecasted revenue with 28 salespeople?

  1. $900,000
  2. $2,100,000
  3. $2,250,000
  4. $2,460,000 (correct answer)
Explanation: Revenue = 1,200,000+(1,200,000 + (45,000 x 28) = $1,200,000 + $1,260,000 = $2,460,000. Option A applies the formula with only the new hires (8 x $45,000 = $360,000 + $1,200,000 = $1,560,000, incorrect). Option B uses only the current headcount of 20 without the intercept being applied properly. Option C uses 23 salespeople rather than 28.

Question 17

A sales team provides a bottom-up revenue estimate of $18,000,000. Management applies a 15% haircut, citing the sales team's history of over-forecasting, and uses $15,300,000 as the forecast. Which analytical approach is most sound?

  1. The haircut should be based on a structured analysis of historical forecast accuracy - if the sales team has consistently over-forecasted by a quantifiable and stable bias, the adjustment should reflect that measured bias rather than an arbitrary round percentage (correct answer)
  2. The sales team's bottom-up estimate should always be used without adjustment because they have superior operational knowledge
  3. Top-down management adjustments are never appropriate and all forecasts should rely solely on bottom-up estimates
  4. A 15% haircut is the industry-standard adjustment for sales force forecast optimism bias
Explanation: Acknowledging that sales team forecasts can be biased is analytically sound - sales teams often face incentives to provide optimistic projections. However, the adjustment should be data-driven: how much has the team historically over-forecasted on average? If the historical over-forecast has been 8%, applying a 15% haircut is itself inaccurate. A rigorous approach would quantify the bias from historical data and apply a calibrated, consistent adjustment. Option B ignores the documented bias. Option C eliminates a legitimate management judgment role. Option D treats a specific percentage as universal when no such standard exists.

Question 18

A company forecasts annual revenue of $12,000,000 with quarterly seasonal indices of: Q1 = 0.85, Q2 = 1.10, Q3 = 1.25, Q4 = 0.80. What is the forecasted Q3 revenue?

  1. $3,000,000
  2. $3,750,000 (correct answer)
  3. $4,500,000
  4. $2,550,000
Explanation: Base quarterly revenue = $12,000,000 / 4 = $3,000,000. Q3 forecast = $3,000,000 x 1.25 = 3,750,000.Theseasonalindexof1.25indicatesQ3historicallyruns253,750,000. The seasonal index of 1.25 indicates Q3 historically runs 25% above the average quarter. Option A is the unadjusted base quarterly figure. Option C applies a 1.50 index. Option D is the Q1 forecast (3,000,000 x 0.85).

Question 19

A retail company projects COGS of $4,500,000 and targets an inventory turnover ratio of 6x. What is the forecasted average inventory balance?

  1. $27,000,000
  2. $900,000
  3. $750,000 (correct answer)
  4. $600,000
Explanation: Inventory turnover = COGS / Average inventory, so Average inventory = COGS / Turnover = $4,500,000 / 6 = $750,000. Option A multiplies COGS by turnover rather than dividing. Option B divides by 5 rather than 6. Option D divides by 7.5.

Question 20

In bottom-up revenue forecasting, the starting point is which of the following?

  1. Detailed estimates at the product, customer, region, or salesperson level that are aggregated to arrive at total revenue (correct answer)
  2. An estimate of total market size from which a market share percentage is applied
  3. Historical revenue trends extrapolated forward using a growth rate assumption
  4. The minimum revenue required to achieve a specified profitability target
Explanation: Bottom-up forecasting builds from granular, operational-level estimates - individual products, customers, territories, or salespeople - aggregating them into a total. This approach leverages detailed knowledge of specific opportunities and constraints. Option B describes top-down forecasting. Option C describes trend extrapolation. Option D describes a target-based approach that works backward from a profitability goal rather than estimating from the ground up.