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ACCA FM practice questions

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Question 1Financial management function

Which objective is most widely accepted as the primary financial objective of a listed company?

  1. Maximising the company's market share
  2. Maximising the number of employees
  3. Maximising shareholder wealth Correct answer.
  4. Minimising the annual tax charge

Explanation

The primary financial objective of a listed company is normally taken to be the maximisation of shareholder wealth, because shareholders are the residual owners and bear the greatest risk. Wealth maximisation reflects long-term cash flows and risk rather than a single accounting figure.

Question 2Financial management function

Which situation best illustrates an agency problem within a company?

  1. A company raises finance by issuing new shares.
  2. A company pays a dividend to its shareholders.
  3. Directors pursue their own interests. Correct answer.
  4. A bank provides a long-term loan to a company.

Explanation

An agency relationship arises when owners, as principals, delegate decision-making to managers as agents. An agency problem exists when managers act in their own interests rather than in the owners' interests.

Question 3Financial management function

Which group is an internal stakeholder of a company?

  1. Employees Correct answer.
  2. Suppliers
  3. Lenders
  4. Customers

Explanation

Internal stakeholders are groups inside or closely involved in the organisation, such as employees and managers. Customers, suppliers and lenders are external parties.

Question 4Financial management function

Which activity is normally the responsibility of a company's treasury function?

  1. Setting the selling prices of products
  2. Managing foreign exchange exposure Correct answer.
  3. Preparing the statutory financial statements
  4. Carrying out the external audit

Explanation

The treasury function manages the company's cash, liquidity, funding and financial risks, including foreign exchange exposure. It does not normally prepare statutory accounts, conduct audits or set product prices.

Question 5Financial management function

What is the main role of financial intermediation?

  1. Auditing the accounts of listed companies
  2. Guaranteeing that investors earn a profit
  3. Channelling funds from savers to borrowers Correct answer.
  4. Setting official interest rates

Explanation

Financial intermediation channels funds from savers who have surplus funds to borrowers who need finance, typically through banks and other institutions. It does not guarantee profits or set official interest rates.

Question 6Financial management function

Which market is used for trading short-term debt instruments?

  1. Money market Correct answer.
  2. Capital market
  3. Foreign exchange market
  4. Primary market

Explanation

The money market deals in short-term debt instruments, such as Treasury bills and commercial paper, typically with maturities of one year or less. The capital market handles longer-term securities.

Question 7Financial management function

What does limited liability mean for shareholders of a company?

  1. They are personally liable for all company debts.
  2. They receive a fixed rate of dividend each year.
  3. They must sell their shares when the company makes a loss.
  4. They can lose only the amount they have invested. Correct answer.

Explanation

Limited liability means that shareholders cannot normally be required to contribute more than the amount unpaid on their shares. Their personal assets are protected if the company cannot pay its debts.

Question 8Financial management function

A company sells new shares to investors to raise capital. In which market does this transaction take place?

  1. Money market
  2. Primary market Correct answer.
  3. Interbank market
  4. Secondary market

Explanation

A primary market transaction occurs when a company issues new securities and receives the proceeds. The secondary market involves trading existing securities between investors.

Question 9Financial management function

Which item is an example of an agency cost caused by the separation of ownership and control?

  1. The annual depreciation of factory machinery
  2. The cost of raw materials used in the production process
  3. The interest paid on a long-term bank loan
  4. The fee paid for an external audit required by shareholders Correct answer.

Explanation

Agency costs are costs incurred to monitor, bond or control managers so that they act in the owners' interests. An external audit required by shareholders is a monitoring cost.

Question 10Financial management function

What is the main purpose of corporate governance?

  1. To increase the company's share of its market
  2. To remove all risk from the company's operations
  3. To guarantee that the company makes a profit
  4. To make directors accountable to shareholders Correct answer.

Explanation

Corporate governance is the system of rules and practices by which a company is directed and controlled. It aims to make directors accountable to shareholders and to consider the interests of other stakeholders.

Question 11Financial management function

Which objective is most appropriate for a not-for-profit organisation?

  1. Increasing its share price on the stock exchange
  2. Maximising shareholder wealth
  3. Achieving value for money in its mission Correct answer.
  4. Paying the highest possible dividend

Explanation

A not-for-profit organisation exists to pursue a social or charitable mission rather than to maximise owner wealth. Value for money means achieving the mission effectively and efficiently with the resources available.

Question 12Financial management function

Which statement best distinguishes financial accounting from management accounting?

  1. Financial reports are mainly for external users. Correct answer.
  2. Management reports must follow international standards.
  3. Management reports are always audited.
  4. Financial reports focus only on future budgets.

Explanation

Financial accounting produces general-purpose reports for external users and is governed by accounting standards and company law. Management accounting provides internal reports for planning, control and decision-making and is not bound by external reporting rules.

Question 13Financial management function

Under a stakeholder approach, what should a company seek to do?

  1. Balance the interests of all affected groups Correct answer.
  2. Avoid paying dividends to shareholders
  3. Maximise short-term profit for shareholders only
  4. Reduce the number of employees

Explanation

The stakeholder approach recognises that a company affects and is affected by many groups, including employees, customers, suppliers, lenders and the community. Management seeks to balance these interests rather than focus only on shareholders.

Question 14Financial management function

A finance manager approves the purchase of a new machine. Which type of decision is this?

  1. A financing decision
  2. A corporate governance decision
  3. A dividend decision
  4. An investment decision Correct answer.

Explanation

The investment decision concerns the selection of long-term assets and projects that are expected to generate future returns. Buying a machine is capital expenditure intended to create value.

Question 15Financial management function

Which decision deals with how much of a company's profit should be paid to shareholders?

  1. The financing decision
  2. The investment decision
  3. The dividend decision Correct answer.
  4. The working capital decision

Explanation

The dividend decision determines how much profit is distributed to shareholders and how much is retained for reinvestment. It is one of the three main financial management decisions alongside investment and financing.

Question 16Financial management function

Which security is normally traded in the capital market?

  1. A three-month bank deposit
  2. A 90-day Treasury bill
  3. A ten-year corporate bond Correct answer.
  4. An overnight interbank loan

Explanation

The capital market is used for long-term securities, such as shares, long-term bonds and medium- to long-term debt. A ten-year corporate bond is a capital market instrument.

Question 17Financial management function

Which function is performed by a stock exchange?

  1. Lending money directly to companies
  2. Setting each company's dividend policy
  3. Guaranteeing that share prices will rise
  4. Providing a market for existing shares Correct answer.

Explanation

A stock exchange provides a regulated marketplace where existing shares and other securities can be bought and sold, giving investors liquidity. It does not guarantee prices or set company dividend policies.

Question 18Financial management function

A conflict between shareholders and lenders is most likely to arise when...

  1. the company publishes its annual financial statements to investors
  2. a director resigns from the board
  3. the company pays its interest on time
  4. shareholders approve a risky project using existing debt Correct answer.

Explanation

Lenders receive a fixed return and bear downside risk, while shareholders benefit from upside gains. Shareholders may therefore favour riskier projects than lenders would accept, especially when the debt is already in place.

Question 19Financial management function

Which feature is typical of a sole trader business?

  1. Unlimited liability for the owner Correct answer.
  2. The owner has limited liability for business debts.
  3. Shares are traded on a stock exchange.
  4. Ownership is separated from control.

Explanation

A sole trader is an unincorporated business owned by one person. The owner has unlimited liability, meaning personal assets may be used to pay business debts.

Question 20Financial management function

Why is profit maximisation often considered a less satisfactory objective than shareholder wealth maximisation?

  1. Profit is always lower than cash flow.
  2. Profit ignores timing and risk of cash flows Correct answer.
  3. Shareholder wealth ignores the payment of dividends.
  4. Profit cannot be measured over a year.

Explanation

Profit maximisation focuses on an accounting measure and does not directly consider when cash flows occur or the risk attached to them. Shareholder wealth maximisation considers the timing and risk of future cash flows and therefore better reflects value.

Question 21Financial management function

How should a company's financial objectives relate to its corporate strategy?

  1. They should focus only on reducing operating costs.
  2. They should replace the organisation's corporate strategy.
  3. They should be set independently of the strategy.
  4. They should support the organisation's strategic goals. Correct answer.

Explanation

Financial objectives translate corporate strategy into measurable financial targets and should support the strategic goals of the organisation. They are part of, not a replacement for, the overall strategy.

Question 22Financial management function

Which mechanism is most likely to align directors' interests with those of shareholders?

  1. Setting directors' pay only by reference to the size of the company
  2. Share options that vest only on meeting performance targets Correct answer.
  3. Appointing directors for an indefinite period
  4. Paying directors a fixed salary that does not change with performance

Explanation

Share options linked to performance give directors a direct financial interest in increasing shareholder value. Fixed pay, indefinite appointments and size-based pay weaken the link between reward and shareholder outcomes.

Question 23Financial management function

If a stock market is semi-strong form efficient, which statement is true?

  1. Share prices never change.
  2. Insiders can always earn abnormal profits.
  3. Prices reflect all public information Correct answer.
  4. Share prices reflect only past price movements.

Explanation

In a semi-strong form efficient market, prices adjust rapidly to all publicly available information, so trading on public information should not consistently produce abnormal profits. Only private information could do so in this form.

Question 24Financial management function

Which practice is most consistent with good corporate governance?

  1. Separating the roles of chairman and chief executive Correct answer.
  2. Paying directors only a fixed cash salary regardless of performance
  3. Allowing the chief executive to appoint the external auditor
  4. Combining the roles of chairman and chief executive

Explanation

Good corporate governance generally requires a separation of the roles of chairman and chief executive to prevent excessive concentration of power. Independence in audit appointments and performance-linked pay also support accountability.

Question 25Financial management function

Which benefit is associated with a centralised treasury function in a group of companies?

  1. Better netting of group currency exposures Correct answer.
  2. Complete elimination of financial risk
  3. Higher group borrowing costs
  4. Slower financial decisions for each subsidiary

Explanation

Centralising treasury allows a group to net off offsetting currency exposures and cash balances, which can reduce transaction costs and hedging requirements. It does not eliminate all financial risk or necessarily slow decisions.

Question 26Financial management function

Which of the following is the primary financial objective of a listed company?

  1. Maximisation of annual sales revenue
  2. Minimisation of the company's tax charge
  3. Maximisation of the number of employees
  4. Maximisation of shareholder wealth Correct answer.

Explanation

Shareholder wealth maximisation is the primary objective because it focuses on increasing the long-term market value of the company's equity. It captures the timing and risk of expected future cash flows, which accounting profit and sales measures do not.

Question 27Financial management function

A company issues new ordinary shares to investors through a stock exchange. In which market does this transaction take place?

  1. The derivatives market
  2. The secondary market
  3. The primary market Correct answer.
  4. The money market

Explanation

A primary market transaction involves the issuer selling new securities to investors and raising fresh capital. The secondary market involves trading securities that are already in issue between investors.

Question 28Financial management function

Which of the following instruments is most typically traded in the money market?

  1. Long-dated government bonds
  2. Corporate debentures with a 20-year term
  3. Treasury bills Correct answer.
  4. Ordinary shares of a listed manufacturer

Explanation

Money market instruments are short-term, highly liquid debt securities with maturities usually of one year or less. Treasury bills are issued by governments at a discount and redeemed at face value.

Question 29Financial management function

What is the main economic function of financial intermediaries?

  1. Setting the official interest rate for the economy
  2. Issuing currency on behalf of the government
  3. Guaranteeing that all investors earn a positive return
  4. Channelling funds from savers to borrowers Correct answer.

Explanation

Financial intermediaries pool funds from savers and allocate them to borrowers, reducing search and transaction costs. They also transform maturities and diversify risk.

Question 30Financial management function

An agency problem arises when:

  1. A company borrows from a bank rather than issuing shares
  2. A firm pays a dividend instead of retaining profit
  3. Managers pursue their own interests rather than those of shareholders Correct answer.
  4. Shareholders diversify their portfolios across industries

Explanation

An agency relationship exists when managers act on behalf of shareholders, and a conflict arises when managers prioritise their own interests. Examples include excessive perks, empire building or avoiding profitable risk.

Question 31Financial management function

Which function is performed by a central bank when it lends to a solvent bank facing a temporary liquidity shortage?

  1. Conducting open market operations
  2. Managing the national debt
  3. Acting as lender of last resort Correct answer.
  4. Acting as a fiscal agent

Explanation

Lender of last resort means the central bank provides emergency liquidity to solvent banks facing temporary funding shortages. This helps prevent contagion and systemic collapse.

Question 32Financial management function

A stock exchange most directly helps companies raise capital by:

  1. Insuring investors against losses on shares
  2. Providing a regulated market where securities can be traded Correct answer.
  3. Setting the dividend policy of listed companies
  4. Guaranteeing a minimum share price after listing

Explanation

A stock exchange provides a regulated secondary market that gives investors liquidity and price discovery. This makes investors more willing to buy new issues, lowering the cost of equity for companies.

Question 33Financial management function

According to the Fisher effect, the nominal interest rate is approximately equal to:

  1. The real interest rate minus expected inflation
  2. The real interest rate plus expected inflation Correct answer.
  3. Expected inflation minus the real interest rate
  4. The real interest rate divided by expected inflation

Explanation

The Fisher effect states that the nominal interest rate is approximately the real interest rate plus expected inflation. Lenders demand compensation for the expected loss of purchasing power.

Question 34Financial management function

Why is maximising profit considered an inferior objective to maximising shareholder wealth?

  1. Profit cannot be measured using accounting standards
  2. Profit is only relevant to not-for-profit organisations
  3. Profit ignores the timing and risk of cash flows Correct answer.
  4. Profit is always lower than cash flow

Explanation

Profit is an accounting measure for a period and does not directly capture when cash flows occur or the risk attached to them. Shareholder wealth depends on the present value of expected future cash flows.

Question 35Financial management function

A company appoints non-executive directors who have no material business relationship with the firm. This is intended mainly to:

  1. Increase the day-to-day control of executive directors
  2. Guarantee that the company avoids financial distress
  3. Strengthen independent oversight of management Correct answer.
  4. Reduce the company's cost of borrowings directly

Explanation

Independent non-executive directors provide objective oversight and challenge executive management. This reduces agency risk and strengthens board accountability.

Question 36Financial management function

To implement an expansionary monetary policy, a central bank would most likely:

  1. Buy government securities in the open market Correct answer.
  2. Increase the required reserve ratio for commercial banks
  3. Sell government securities in the open market
  4. Raise the official policy interest rate

Explanation

Buying government securities injects cash into the banking system and tends to lower short-term interest rates. This is an expansionary open market operation.

Question 37Financial management function

An upward-sloping yield curve most likely indicates that:

  1. Long-term bonds are less risky than short-term bonds
  2. The market expects deflation in the near future
  3. Longer-term interest rates are higher than shorter-term rates Correct answer.
  4. Short-term interest rates are expected to fall sharply

Explanation

An upward-sloping yield curve means long-term yields exceed short-term yields. This can reflect expected future rate rises, term premia, or both.

Question 38Financial management function

Which source of finance is most characteristic of venture capital?

  1. A short-term bank overdraft for working capital
  2. A government grant that requires no repayment
  3. A trade credit arrangement with a supplier
  4. Equity investment in a young, high-growth private company Correct answer.

Explanation

Venture capital is equity or quasi-equity finance for young, high-growth private companies with high risk and potential. Investors often take an active role in management.

Question 39Financial management function

In a semi-strong form efficient market, share prices fully reflect which type of information?

  1. Only information known to insiders
  2. All publicly available information Correct answer.
  3. No information at all
  4. Only past price movements

Explanation

Semi-strong form efficiency means prices already reflect all publicly available information, including financial statements and news. Therefore trading on such information should not consistently yield abnormal returns.

Question 40Financial management function

The stakeholder view of corporate governance differs from the shareholder view mainly because it:

  1. Considers the interests of groups affected by the company Correct answer.
  2. Requires the company to maximise short-term profit
  3. Ignores the interests of lenders and employees
  4. Applies only to state-owned enterprises

Explanation

The stakeholder view holds that companies should account for employees, customers, suppliers, communities and others affected by their activities. The shareholder view prioritises owners' returns.

Question 41Financial management function

What is the main role of a credit rating agency?

  1. Lending funds directly to corporate borrowers
  2. Regulating the conduct of stockbrokers
  3. Underwriting new share issues for companies
  4. Assessing the creditworthiness of debt issuers Correct answer.

Explanation

Credit rating agencies assess the default risk of debt issuers and assign ratings that help investors price credit risk. They do not lend funds or underwrite securities.

Question 42Financial management function

Which activity is most clearly prohibited by securities market regulation?

  1. Diversifying an investment portfolio across sectors
  2. Selling shares to realise a capital gain
  3. Publishing an independent research report on a listed company
  4. Trading shares while in possession of unpublished price-sensitive information Correct answer.

Explanation

Insider trading involves dealing in securities while in possession of material non-public information. It is prohibited because it undermines market fairness and confidence.

Question 43Financial management function

During a recession, a financial manager is most likely to:

  1. Extend generous credit terms to all customers
  2. Increase investment in long-term expansion projects
  3. Raise large amounts of new equity for growth
  4. Focus on cash flow forecasting and tight credit control Correct answer.

Explanation

Recessions typically bring falling demand, tighter credit and higher default risk. Managers therefore prioritise liquidity, cash forecasting and receivables collection.

Question 44Financial management function

In a freely floating exchange rate system, the value of a currency is determined by:

  1. Supply and demand in the foreign exchange market Correct answer.
  2. The government's official target announced each year
  3. A fixed parity set by the International Monetary Fund
  4. The amount of gold held by the central bank

Explanation

In a floating exchange rate regime, currency values are set by market supply and demand without a fixed parity. Central bank intervention may occur but is not the primary determinant.

Question 45Financial management function

Which statement best describes a forward contract in foreign exchange?

  1. It is traded on an organised exchange with standardised terms
  2. It requires an initial margin paid to a clearing house
  3. It is a customised agreement to exchange currencies at a future date Correct answer.
  4. It can be cancelled at any time without cost

Explanation

A forward contract is a customised over-the-counter agreement between two parties to exchange currencies at a specified future date and rate. It is not standardised or exchange-traded.

Question 46Financial management function

According to interest rate parity, the difference between the forward exchange rate and the spot exchange rate between two currencies is primarily determined by:

  1. The inflation rate differential between the two countries
  2. The level of government debt in each country
  3. The interest rate differential between the two countries Correct answer.
  4. The balance of trade between the two countries

Explanation

Interest rate parity states that the forward premium or discount on a currency offsets the interest rate differential between the two countries. Otherwise riskless arbitrage would be possible.

Question 47Financial management function

Why is central bank independence from short-term political control generally considered desirable?

  1. It supports a credible commitment to low and stable inflation Correct answer.
  2. It removes the need for financial market regulation
  3. It allows the central bank to finance government spending directly
  4. It guarantees that unemployment remains at zero

Explanation

Independence reduces political pressure to stimulate the economy before elections, which can create inflation bias. It supports a credible commitment to price stability.

Question 48Financial management function

Which of the following is an example of an agency cost arising from the separation of ownership and control?

  1. The cost of auditing the company's financial statements Correct answer.
  2. The interest paid on a bank loan
  3. The dividend paid to ordinary shareholders
  4. The purchase of raw materials for production

Explanation

Agency costs include monitoring and bonding costs incurred to align manager and shareholder interests. Auditing financial statements is a monitoring cost that arises because owners cannot directly observe managers' actions.

Question 49Financial management function

The international Fisher effect suggests that differences in nominal interest rates between two countries are primarily explained by:

  1. Differences in their expected inflation rates Correct answer.
  2. Differences in their corporate tax rates
  3. Differences in their unemployment rates
  4. Differences in their money supply growth targets

Explanation

The international Fisher effect links nominal interest rate differences to expected inflation differences across countries. Higher expected inflation leads to higher nominal rates, all else equal.

Question 50Financial management function

A corporate governance code based on 'comply or explain' means that a listed company:

  1. Must follow every provision without exception
  2. Can ignore the code if its shares are widely held
  3. May depart from a provision if it explains the reasons to shareholders Correct answer.
  4. Must obtain government approval for its board structure

Explanation

Comply or explain allows flexibility: a company may depart from a code provision provided it gives shareholders a reasoned explanation. This is a hallmark of principles-based governance.