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CA ANZ Core 1 practice questions

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Question 1Accounting and financial reporting fundamentals

Under the IASB Conceptual Framework, which qualitative characteristic is enhanced when information is comparable, verifiable, timely and understandable?

  1. Recognition criteria
  2. Enhancing qualitative characteristics Correct answer.
  3. Elements of financial statements
  4. Fundamental qualitative characteristics

Explanation

The Conceptual Framework identifies relevance and faithful representation as fundamental qualitative characteristics, while comparability, verifiability, timeliness and understandability are classified as enhancing characteristics. Enhancing characteristics increase the usefulness of information that is already relevant and faithfully represented. They cannot by themselves make irrelevant information useful.

Question 2Accounting and financial reporting fundamentals

A machine is purchased for $50,000 with an estimated residual value of $5,000 and a useful life of five years. Under the straight-line method, what is the annual depreciation expense?

  1. $9,000 Correct answer.
  2. $10,000
  3. $11,000
  4. $8,000

Explanation

Straight-line depreciation allocates the depreciable amount, being cost less residual value, evenly over the useful life. The depreciable amount is $45,000, divided by five years, giving $9,000 per year. Residual value is excluded because it is expected to be recovered on disposal.

Question 3Accounting and financial reporting fundamentals

Which statement best describes the objective of general purpose financial reporting under the Conceptual Framework?

  1. To provide information to management for internal decision making
  2. To enable taxation authorities to assess the taxable income of the entity
  3. To demonstrate compliance with statutory reporting obligations
  4. To provide financial information about the reporting entity useful to existing and potential investors, lenders and other creditors Correct answer.

Explanation

The Conceptual Framework states that the objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Those users cannot demand information tailored to their needs. Management and regulators may also use the reports but they are not the primary audience.

Question 4Accounting and financial reporting fundamentals

An entity receives $12,000 cash in advance for services to be performed over the next twelve months. Under accrual accounting, how should this be recorded at receipt?

  1. Recognise $1,000 revenue and $11,000 as an asset
  2. Recognise $12,000 revenue immediately
  3. Record $12,000 as an expense
  4. Record $12,000 as a liability until the services are performed Correct answer.

Explanation

Under accrual accounting, revenue is recognised when the performance obligation is satisfied, not when cash is received. Cash received before services are performed creates a present obligation to provide them, which is recorded as a liability such as unearned revenue. The liability is reduced and revenue recognised as the services are delivered.

Question 5Accounting and financial reporting fundamentals

Which of the following is an asset under the Conceptual Framework definition?

  1. Future planned expenditure on staff training
  2. A contingent gain that is possible but not probable
  3. A present economic resource controlled by the entity as a result of past events Correct answer.
  4. A machine leased under a short-term operating arrangement with no control transferred

Explanation

An asset is defined as a present economic resource controlled by the entity as a result of past events, where an economic resource is a right that has the potential to produce economic benefits. Control and a past event are both essential. Planned future expenditure and merely possible gains do not meet the definition.

Question 6Accounting and financial reporting fundamentals

An entity's inventory cost is $80,000 and its net realisable value is $72,000 at reporting date. At what amount should inventory be measured?

  1. $76,000
  2. $80,000
  3. $8,000
  4. $72,000 Correct answer.

Explanation

Inventory is measured at the lower of cost and net realisable value under AASB 102. Because net realisable value of $72,000 is below cost of $80,000, the inventory is written down to $72,000. The $8,000 write-down is recognised as an expense in the period.

Question 7Accounting and financial reporting fundamentals

Which financial statement reports changes in an entity's financial position arising from cash and cash equivalents during a period?

  1. Statement of profit or loss and other comprehensive income
  2. Statement of financial position
  3. Statement of cash flows Correct answer.
  4. Statement of changes in equity

Explanation

The statement of cash flows reports cash inflows and outflows classified into operating, investing and financing activities. It explains the movement in cash and cash equivalents over the period. The statement of financial position shows balances at a point in time rather than movements in cash.

Question 8Accounting and financial reporting fundamentals

Which of the following best describes the going concern assumption?

  1. The entity prepares financial statements only when required by regulators
  2. The entity's assets are always measured at fair value
  3. The entity is expected to continue in operation for the foreseeable future Correct answer.
  4. The entity will be liquidated within the next reporting period

Explanation

The going concern assumption presumes the entity will continue in operation for the foreseeable future, with neither the intention nor the necessity to liquidate or curtail materially its operations. This assumption underpins the preparation of financial statements on an accrual basis. If it is not appropriate, financial statements must be prepared on a different basis and that fact disclosed.

Question 9Accounting and financial reporting fundamentals

An entity issues 10,000 ordinary shares at $2.50 each, fully paid. What is the effect on the statement of financial position?

  1. Increase in liabilities of $25,000 and decrease in equity
  2. Increase in assets of $25,000 and decrease in equity of $25,000
  3. Increase in equity of $25,000 only
  4. Increase in assets of $25,000 and increase in equity of $25,000 Correct answer.

Explanation

Issuing shares for cash increases the entity's cash asset by $25,000 and simultaneously increases contributed equity by the same amount. The accounting equation remains in balance because both sides increase equally. There is no liability created by an equity issue.

Question 10Accounting and financial reporting fundamentals

Which of the following is an example of an adjusting event after the reporting period under AASB 110?

  1. A fire that destroyed the entity's warehouse two weeks after year end
  2. Announcement of a major business combination after year end
  3. A decline in market prices of investments occurring after year end
  4. The bankruptcy of a major customer whose receivable existed at reporting date Correct answer.

Explanation

Adjusting events provide evidence of conditions that existed at the end of the reporting period. A customer's bankruptcy that confirms the receivable was impaired at reporting date is an adjusting event requiring adjustment. Events arising from conditions that arose after year end, such as a fire or a new business combination, are non-adjusting.

Question 11Accounting and financial reporting fundamentals

An entity has a receivable of $40,000 that it estimates will be settled for $34,000. Under the expected credit loss model, what is the impairment allowance?

  1. $0
  2. $34,000
  3. $6,000 Correct answer.
  4. $40,000

Explanation

Under the expected credit loss model, a loss allowance is recognised for the difference between the gross carrying amount and the present value of expected cash flows. The allowance is $40,000 less $34,000, being $6,000. The receivable is presented net of the allowance at $34,000.

Question 12Accounting and financial reporting fundamentals

Which measurement basis reflects the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date?

  1. Fair value Correct answer.
  2. Amortised cost
  3. Value in use
  4. Historical cost

Explanation

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is an exit price notion. Historical cost and amortised cost are entry-based or cost-based measures, and value in use is entity-specific.

Question 13Accounting and financial reporting fundamentals

An entity recognises a provision for a restructuring plan. Which condition must be satisfied for a present obligation to exist?

  1. The entity intends to restructure but has not communicated this to anyone
  2. The entity has merely decided at board level to consider restructuring
  3. The entity expects future operating losses from the restructuring
  4. The entity has a detailed formal plan and has raised a valid expectation in those affected that it will carry out the restructuring Correct answer.

Explanation

Under AASB 137, a constructive obligation arises only when an entity has a detailed formal plan and has raised a valid expectation in those affected that it will carry out the restructuring, by starting to implement it or announcing its main features. A mere board decision or intention is insufficient. Future operating losses are not provided for because no obligation exists for them.

Question 14Accounting and financial reporting fundamentals

Which of the following is a fundamental qualitative characteristic of useful financial information?

  1. Verifiability
  2. Timeliness
  3. Comparability
  4. Faithful representation Correct answer.

Explanation

The two fundamental qualitative characteristics are relevance and faithful representation. Faithful representation means information depicts the substance of the economic phenomenon completely, neutrally and free from error. Comparability, verifiability, timeliness and understandability are enhancing characteristics.

Question 15Accounting and financial reporting fundamentals

An entity sells goods on credit for $10,000 with a cost of $6,000. Which journal entries correctly record the transaction under accrual accounting?

  1. Debit cash $10,000, credit revenue $10,000 only
  2. Debit receivable $10,000, credit inventory $10,000
  3. Debit receivable $10,000, credit revenue $10,000; debit cost of sales $6,000, credit inventory $6,000 Correct answer.
  4. Debit revenue $10,000, credit receivable $10,000

Explanation

Under accrual accounting, a credit sale recognises a receivable and revenue, and simultaneously recognises the cost of the goods sold and reduces inventory. Both entries are required to reflect the gross profit impact. Recording only the revenue ignores the consumption of inventory.

Question 16Accounting and financial reporting fundamentals

Which of the following costs should be capitalised as part of the cost of a self-constructed item of property, plant and equipment?

  1. Directly attributable costs of bringing the asset to the location and condition necessary for its intended use Correct answer.
  2. Costs of relocating staff unrelated to the asset
  3. General administrative overheads
  4. Costs of abnormal waste of materials

Explanation

AASB 116 requires the cost of an item of property, plant and equipment to include all costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Abnormal waste, general overheads and unrelated relocation costs are not directly attributable and are expensed.

Question 17Accounting and financial reporting fundamentals

An entity has current assets of $150,000 and current liabilities of $100,000. It then pays a current liability of $20,000 in cash. What is the current ratio after the payment?

  1. 1.50
  2. 1.75
  3. 1.30
  4. 1.625 Correct answer.

Explanation

Paying a current liability in cash reduces both current assets and current liabilities by $20,000. Current assets become $130,000 and current liabilities $80,000, giving a current ratio of 1.625. The ratio improves because the reduction is applied to a ratio greater than one.

Question 18Accounting and financial reporting fundamentals

Which of the following best describes the difference between capital expenditure and revenue expenditure?

  1. Both are always expensed in the period incurred
  2. Capital expenditure is recorded as an asset and revenue expenditure is expensed in profit or loss Correct answer.
  3. Capital expenditure is only allowed for intangible assets
  4. Capital expenditure is recorded in the statement of profit or loss and revenue expenditure in the statement of financial position

Explanation

Capital expenditure provides future economic benefits extending beyond the current period and is recognised as an asset, then expensed through depreciation or amortisation. Revenue expenditure relates to the current period and is expensed immediately. Misclassifying revenue expenditure as capital overstates profit and assets.

Question 19Accounting and financial reporting fundamentals

An entity uses the revaluation model for a class of buildings. The carrying amount is $500,000 and the fair value is $560,000. There is no previous revaluation deficit. How is the increase treated?

  1. Recognised in other comprehensive income and accumulated in equity as a revaluation surplus Correct answer.
  2. Recognised as a liability
  3. Ignored until the building is sold
  4. Recognised in profit or loss as a gain

Explanation

Under AASB 116, an increase in carrying amount on revaluation is recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. The exception is where the increase reverses a previous revaluation decrease recognised in profit or loss, in which case it is recognised in profit or loss to that extent. No such prior decrease exists here.

Question 20Accounting and financial reporting fundamentals

Which of the following is a correct description of the matching principle?

  1. Assets and liabilities are offset against each other
  2. Expenses are recognised only when paid in cash
  3. Expenses are recognised in the same period as the revenue they help generate Correct answer.
  4. Revenue is recognised when cash is received

Explanation

The matching principle requires expenses to be recognised in the same period as the revenues to which they relate, regardless of when cash is paid. This supports accrual accounting and the determination of profit for a period. It does not require expenses to be paid in cash in that period.

Question 21Accounting and financial reporting fundamentals

An entity has taxable temporary differences of $30,000 and a tax rate of 30%. What is the deferred tax liability?

  1. $30,000
  2. $0
  3. $9,000 Correct answer.
  4. $3,000

Explanation

A deferred tax liability arises from taxable temporary differences, being amounts that will be taxable in future periods. It is measured at the tax rate expected to apply, giving $30,000 multiplied by 30% equals $9,000. The liability is recognised in full unless an exemption applies.

Question 22Accounting and financial reporting fundamentals

An entity recognises a provision for a warranty. Which measurement approach does AASB 137 require?

  1. The maximum possible outflow
  2. The best estimate of the expenditure required to settle the present obligation at reporting date Correct answer.
  3. The minimum possible outflow
  4. The amount already paid in cash for warranty claims

Explanation

AASB 137 requires a provision to be measured at the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. Where the effect is material, the estimate is discounted to present value. Provisions are not measured at the maximum or minimum possible outflow.

Question 23Accounting and financial reporting fundamentals

An entity's statement of financial position shows total assets of $800,000, total liabilities of $300,000 and contributed equity of $400,000. What is retained earnings?

  1. $300,000
  2. $200,000
  3. $100,000 Correct answer.
  4. $500,000

Explanation

The accounting equation states that assets equal liabilities plus equity, so equity equals $800,000 less $300,000, being $500,000. Equity comprises contributed equity of $400,000 plus retained earnings, so retained earnings equal $100,000. This reconciles the statement of financial position.

Question 24Accounting and financial reporting fundamentals

An entity enters a finance lease. Which statement best describes the lessee's accounting under AASB 16?

  1. Lease payments are expensed evenly over the lease term with no asset recognised
  2. Only the lease liability is recognised, with no asset
  3. The leased asset is not recognised until the option to purchase is exercised
  4. A right-of-use asset and a lease liability are recognised at the present value of lease payments Correct answer.

Explanation

AASB 16 requires a lessee to recognise a right-of-use asset and a lease liability at the commencement date, measured at the present value of lease payments not paid at that date. The asset is subsequently depreciated and the liability reduced as payments are made, with interest recognised. This replaces the previous operating lease expensing treatment for most leases.

Question 25Accounting and financial reporting fundamentals

An entity has a building with a carrying amount of $400,000. Its fair value less costs of disposal is $360,000 and its value in use is $380,000. What is the impairment loss under AASB 136?

  1. $0
  2. $20,000 Correct answer.
  3. $40,000
  4. $60,000

Explanation

Under AASB 136, the recoverable amount is the higher of fair value less costs of disposal and value in use, which is $380,000 here. An impairment loss arises where the carrying amount exceeds the recoverable amount, being $400,000 less $380,000, which equals $20,000. Using the lower amount would overstate the impairment.

Question 26Accounting and financial reporting fundamentals

Which of the following best describes the purpose of the statement of profit or loss and other comprehensive income?

  1. To report the cash flows of an entity for a period.
  2. To disclose changes in contributed equity during a period.
  3. To show the financial performance of an entity for a period. Correct answer.
  4. To show the financial position of an entity at a specific date.

Explanation

The statement of profit or loss and other comprehensive income reports an entity's financial performance for a period by presenting income and expenses. It explains how profit or loss and other comprehensive income arise from the entity's operations. It does not show financial position at a point in time, which is the role of the statement of financial position.

Question 27Accounting and financial reporting fundamentals

An entity purchases equipment for $50,000. It pays $20,000 in cash and signs a $30,000 note payable for the balance. What is the effect on the accounting equation?

  1. Assets increase by $50,000 and equity increases by $30,000.
  2. Assets increase by $50,000 and liabilities increase by $30,000. Correct answer.
  3. Assets increase by $20,000 and liabilities increase by $20,000.
  4. Assets increase by $30,000 and liabilities increase by $30,000.

Explanation

The equipment increases assets by $50,000. The cash payment reduces assets by $20,000, so net assets increase by $30,000. The note payable increases liabilities by $30,000, keeping the accounting equation in balance (assets = liabilities + equity).

Question 28Accounting and financial reporting fundamentals

Under the accrual basis of accounting, when should revenue from the sale of goods be recognised?

  1. When the order is placed by the customer.
  2. When the invoice is issued to the customer.
  3. When cash is received from the customer.
  4. When the goods are delivered and control passes to the customer. Correct answer.

Explanation

Revenue is recognised when control of the goods transfers to the customer, which is typically upon delivery. This reflects the transfer of promised goods or services in an amount that reflects the consideration expected. Cash receipt or invoicing may occur at a different time and does not determine recognition.

Question 29Accounting and financial reporting fundamentals

An entity has a machine with a cost of $100,000, a residual value of $10,000, and a useful life of 5 years. Using the straight-line method, what is the annual depreciation expense?

  1. $22,000
  2. $20,000
  3. $18,000 Correct answer.
  4. $10,000

Explanation

Straight-line depreciation allocates the depreciable amount, which is cost less residual value ($100,000 - $10,000 = $90,000), evenly over the useful life. Dividing $90,000 by 5 years gives $18,000 per year. The residual value is not depreciated because it is expected to be recovered at the end of the asset's life.

Question 30Accounting and financial reporting fundamentals

Which of the following is an example of an asset that meets the definition of a liability?

  1. Prepaid insurance for the next period.
  2. Trade receivables from customers.
  3. Cash on hand.
  4. A bank overdraft repayable on demand. Correct answer.

Explanation

A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources. A bank overdraft represents a present obligation to repay the bank, arising from past borrowing, and will result in an outflow of cash. Trade receivables, prepaid insurance, and cash are assets, not liabilities.

Question 31Accounting and financial reporting fundamentals

An entity has a building with a carrying amount of $500,000. At reporting date, its fair value less costs of disposal is $480,000 and its value in use is $490,000. What is the recoverable amount and the impairment loss?

  1. Recoverable amount $480,000; impairment loss $10,000.
  2. Recoverable amount $490,000; impairment loss $10,000. Correct answer.
  3. Recoverable amount $490,000; impairment loss $20,000.
  4. Recoverable amount $480,000; impairment loss $20,000.

Explanation

Recoverable amount is the higher of fair value less costs of disposal and value in use. Here, the higher is $490,000 (value in use). The impairment loss is the carrying amount ($500,000) less the recoverable amount ($490,000), which equals $10,000.

Question 32Accounting and financial reporting fundamentals

Which of the following best describes the objective of general purpose financial reporting?

  1. To provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors. Correct answer.
  2. To provide information to regulators for compliance purposes.
  3. To provide information to management for decision making.
  4. To determine the taxable income of the entity.

Explanation

The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity. It is not primarily for management, regulators, or tax authorities, although they may also use the information.

Question 33Accounting and financial reporting fundamentals

An entity uses the allowance method for doubtful debts. It estimates that 5% of its $200,000 accounts receivable will be uncollectible. The allowance account currently has a credit balance of $2,000. What is the adjusting entry?

  1. Debit Allowance for Doubtful Debts $8,000; Credit Bad Debt Expense $8,000.
  2. Debit Bad Debt Expense $12,000; Credit Allowance for Doubtful Debts $12,000.
  3. Debit Bad Debt Expense $8,000; Credit Allowance for Doubtful Debts $8,000. Correct answer.
  4. Debit Bad Debt Expense $10,000; Credit Allowance for Doubtful Debts $10,000.

Explanation

The required allowance is 5% of $200,000, which is $10,000. Since the allowance account already has a credit balance of $2,000, the adjustment needed is $8,000 to bring the allowance to $10,000. The entry increases the expense and the allowance by $8,000.

Question 34Accounting and financial reporting fundamentals

Which of the following is a correct statement about the recognition of a provision under AASB 137?

  1. A provision is recognised when there is a possible obligation that will probably not require an outflow.
  2. A provision is recognised when the entity has a future obligation that it can avoid through future actions.
  3. A provision is recognised when there is a present obligation arising from a past event, it is probable that an outflow will be required, and a reliable estimate can be made. Correct answer.
  4. A provision is recognised only when the amount and timing of the outflow are certain.

Explanation

A provision is a liability of uncertain timing or amount. It is recognised when an entity has a present obligation as a result of a past event, it is probable that an outflow of resources will be required to settle it, and a reliable estimate can be made of the amount. Certainty is not required, and future obligations that can be avoided do not meet the definition.

Question 35Accounting and financial reporting fundamentals

Which of the following best describes the concept of materiality in financial reporting?

  1. Information is material if it is required by law.
  2. Information is material if omitting or misstating it could influence decisions that users make on the basis of the financial statements. Correct answer.
  3. Information is material if it relates to cash transactions.
  4. Information is material if it is greater than 10% of total assets.

Explanation

Materiality is an entity-specific aspect of relevance based on the nature or magnitude of items to which the information relates. Information is material if omitting or misstating it could influence the economic decisions of users. It is not determined by a fixed percentage or by legal requirements alone.

Question 36Accounting and financial reporting fundamentals

An entity has a defined benefit pension plan. At year-end, the present value of the defined benefit obligation is $500,000 and the fair value of plan assets is $450,000. What is the net defined benefit liability?

  1. $0
  2. $450,000
  3. $500,000
  4. $50,000 Correct answer.

Explanation

The net defined benefit liability is the present value of the defined benefit obligation less the fair value of plan assets. Here, $500,000 - $450,000 = $50,000. If plan assets exceeded the obligation, a net defined benefit asset would arise, subject to a ceiling.

Question 37Accounting and financial reporting fundamentals

Which of the following is a correct description of the going concern assumption?

  1. The entity's assets are valued at their liquidation value.
  2. The entity will continue in operation for the foreseeable future. Correct answer.
  3. The entity will be liquidated in the next 12 months.
  4. The entity will not undertake any new transactions.

Explanation

The going concern assumption is that the entity will continue in operation for the foreseeable future, without the intention or necessity to liquidate or curtail materially the scale of its operations. This assumption underpins the preparation of financial statements on a historical cost basis, rather than on a break-up basis.

Question 38Accounting and financial reporting fundamentals

An entity enters into a finance lease for a machine. The lease term is 5 years, and the present value of lease payments is $100,000. The machine's fair value is $110,000. At inception, how should the lessee recognise the lease?

  1. Recognise a lease liability of $100,000 and no right-of-use asset.
  2. Recognise a right-of-use asset and a lease liability of $110,000.
  3. Recognise a lease expense of $20,000 per year.
  4. Recognise a right-of-use asset and a lease liability of $100,000. Correct answer.

Explanation

Under AASB 16, a lessee recognises a right-of-use asset and a lease liability at the present value of the lease payments that are not paid at the commencement date. The present value is $100,000, so both the asset and liability are initially measured at that amount. The fair value of the machine is not the measurement basis for the lessee's right-of-use asset.

Question 39Accounting and financial reporting fundamentals

An entity uses the revaluation model for a class of buildings. The carrying amount is $500,000 and the fair value is $560,000. The entity had previously recognised a revaluation surplus of $30,000 for the same class. What is the accounting treatment for the increase?

  1. Recognise other comprehensive income of $30,000 and a gain of $30,000 in profit or loss.
  2. Recognise other comprehensive income of $60,000 and increase the revaluation surplus. Correct answer.
  3. Recognise a gain of $60,000 in profit or loss.
  4. Recognise a gain of $60,000 in other comprehensive income and reduce the revaluation surplus.

Explanation

Under the revaluation model, an increase in the carrying amount of an asset is recognised in other comprehensive income and accumulated in equity under the heading revaluation surplus. The increase is the difference between fair value and carrying amount, $60,000. It is not recognised in profit or loss unless it reverses a previous revaluation decrease that was recognised in profit or loss.

Question 40Accounting and financial reporting fundamentals

An entity has a taxable temporary difference of $30,000 and a tax rate of 30%. What is the deferred tax liability?

  1. $0
  2. $9,000 Correct answer.
  3. $30,000
  4. $3,000

Explanation

A deferred tax liability is calculated by multiplying the taxable temporary difference by the tax rate that is expected to apply when the liability is settled. Here, $30,000 × 30% = $9,000. This represents the amount of income tax payable in future periods.

Question 41Management accounting and cost analysis

A manufacturer produces a single product. Which cost remains constant in total when output rises within the relevant range?

  1. Total direct material cost
  2. Total sales commission paid per unit sold
  3. Total fixed cost Correct answer.
  4. Total variable cost

Explanation

A fixed cost is constant in total across the relevant range of activity, although it falls per unit as output rises. Variable costs such as materials and per-unit commissions increase in total as activity increases.

Question 42Management accounting and cost analysis

Which of the following is classified as a product cost for an external financial reporting purpose?

  1. Delivery cost to customers
  2. Sales staff salaries
  3. Depreciation of factory machinery Correct answer.
  4. Advertising expense

Explanation

Product costs attach to inventory and include direct materials, direct labour and manufacturing overhead such as factory depreciation. They are expensed only when the inventory is sold as cost of goods sold.

Question 43Management accounting and cost analysis

A firm has fixed costs of $120,000 and a contribution margin ratio of 40%. What is the break-even sales revenue?

  1. $300,000 Correct answer.
  2. $480,000
  3. $48,000
  4. $200,000

Explanation

Break-even sales revenue equals fixed costs divided by the contribution margin ratio, so $120,000 ÷ 0.40 = $300,000. At that revenue the contribution generated exactly covers the fixed costs and profit is zero.

Question 44Management accounting and cost analysis

Which inventory costing method generally produces the highest cost of goods sold during a period of rising prices?

  1. Last-in, first-out Correct answer.
  2. First-in, first-out
  3. Specific identification
  4. Weighted average

Explanation

When prices are rising, LIFO charges the most recent and therefore highest purchase costs against revenue, giving the highest cost of goods sold and lowest closing inventory. FIFO instead leaves the newer, higher costs in inventory.

Question 45Management accounting and cost analysis

A company uses a predetermined overhead rate based on machine hours. Budgeted overhead is $450,000 and budgeted machine hours are 30,000. Actual overhead was $470,000 and actual machine hours were 32,000. What is the amount of overhead applied?

  1. $480,000 Correct answer.
  2. $450,000
  3. $440,000
  4. $470,000

Explanation

The predetermined rate is $450,000 ÷ 30,000 = $15 per machine hour. Applying this rate to the 32,000 actual hours gives $480,000 of overhead applied to production.

Question 46Management accounting and cost analysis

Which statement best describes a sunk cost?

  1. A cost already incurred that cannot be changed by a future decision Correct answer.
  2. A cost that is avoidable if a project is rejected
  3. A cost that differs between alternatives under consideration
  4. The additional cost of producing one more unit

Explanation

A sunk cost has already been incurred and is unaffected by any current or future decision, so it should be ignored in relevant-cost analysis. Relevant costs are instead those that differ between alternatives and lie in the future.

Question 47Management accounting and cost analysis

A product sells for $50 per unit with variable costs of $30 per unit and fixed costs of $90,000. How many units must be sold to earn a target profit of $30,000?

  1. 1,500 units
  2. 6,000 units Correct answer.
  3. 4,500 units
  4. 4,000 units

Explanation

Contribution per unit is $50 − $30 = $20. Required units equal fixed costs plus target profit divided by contribution per unit: ($90,000 + $30,000) ÷ $20 = 6,000 units.

Question 48Management accounting and cost analysis

In a process costing system using the weighted average method, equivalent units are calculated to:

  1. Express partially completed work in terms of completed units Correct answer.
  2. Determine the number of defective units produced
  3. Allocate fixed costs over the useful life of machinery
  4. Measure the physical units transferred out of the process

Explanation

Equivalent units convert partially completed work into the number of whole units it represents, allowing costs to be spread across completed and incomplete output. This is necessary because units in closing work in progress are only partly finished.

Question 49Management accounting and cost analysis

A company has a margin of safety of $80,000 and current sales of $400,000. What is the margin of safety expressed as a percentage?

  1. 20% Correct answer.
  2. 5%
  3. 25%
  4. 80%

Explanation

The margin of safety percentage equals margin of safety divided by actual sales: $80,000 ÷ $400,000 = 20%. It measures how far sales can fall before the business reaches break-even.

Question 50Management accounting and cost analysis

Which of the following is the strongest indicator that a cost is relevant to a decision?

  1. The cost has been recorded in the accounting system
  2. The cost is classified as fixed
  3. The cost will change as a result of the decision Correct answer.
  4. The cost is large in amount

Explanation

Relevant costs are future costs that differ between the alternatives being considered. A cost that changes as a direct result of the decision meets both conditions, regardless of its size or classification.