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CIMA practice questions

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Question 1Fundamentals

A business has total assets of $250,000 and liabilities of $90,000. What is the amount of capital?

  1. $340,000
  2. $160,000 Correct answer.
  3. $90,000
  4. $250,000

Explanation

The accounting equation states that assets equal capital plus liabilities, so capital is the balancing figure: $250,000 − $90,000 = $160,000. Capital represents the owner's residual interest in the assets after liabilities are deducted.

Question 2Fundamentals

Which of the following best describes contribution?

  1. Sales revenue less all costs incurred
  2. Sales revenue less cost of goods sold
  3. Sales revenue less fixed costs
  4. Sales revenue less variable costs Correct answer.

Explanation

Contribution is sales revenue minus variable costs, and it must cover fixed costs before any profit arises. It can be calculated per unit or in total.

Question 3Fundamentals

What is included in prime cost?

  1. All costs incurred in the factory
  2. Direct materials, direct labour and direct expenses Correct answer.
  3. Direct labour plus production overheads
  4. Total production cost of the goods manufactured during the period

Explanation

Prime cost comprises the direct costs of production: direct materials, direct labour and direct expenses. Production overheads are excluded from prime cost because they cannot be traced in full to a unit of output.

Question 4Fundamentals

Which of the following is a direct cost of a manufactured product?

  1. Factory rent
  2. Wages of machine operators Correct answer.
  3. Depreciation of factory machinery
  4. Salary of the production supervisor

Explanation

A direct cost can be traced in full to a unit of output, and machine operators' wages vary directly with the units produced. Rent, machinery depreciation and supervision are incurred for the factory as a whole and are therefore indirect costs.

Question 5Fundamentals

Goods are purchased on credit. What is the correct double entry?

  1. Debit purchases, credit cash
  2. Debit purchases, credit payables Correct answer.
  3. Debit payables, credit purchases
  4. Debit inventory, credit revenue

Explanation

A credit purchase increases the purchases expense, so purchases is debited, and it creates a liability to the supplier, so payables is credited. No cash moves until the supplier is paid.

Question 6Fundamentals

Spreading the cost of a non-current asset over the periods that benefit from its use is an application of which accounting concept?

  1. Going concern
  2. Matching Correct answer.
  3. Business entity
  4. Prudence

Explanation

The matching principle requires costs to be recognised in the same period as the benefits they generate, so an asset's cost is allocated over the periods that consume its service potential.

Question 7Fundamentals

Which of the following is a current asset?

  1. A bank loan repayable in five years
  2. Retained earnings
  3. Inventory held for resale Correct answer.
  4. Motor vehicles used by the sales team

Explanation

Current assets are held for conversion into cash within the normal operating cycle, and inventory held for resale meets that definition.

Question 8Fundamentals

How is the break-even point in units calculated?

  1. Fixed costs divided by contribution per unit Correct answer.
  2. Fixed costs divided by selling price per unit
  3. Fixed costs divided by total contribution
  4. Total costs divided by contribution per unit

Explanation

Break-even volume equals fixed costs divided by contribution per unit, because that is the number of units whose contribution exactly covers the fixed costs. At that volume profit is zero.

Question 9Fundamentals

Fixed costs are $48,000, the selling price is $20 per unit and variable cost is $8 per unit. How many units must be sold to earn a profit of $24,000?

  1. 2,000 units
  2. 6,000 units Correct answer.
  3. 4,000 units
  4. 7,000 units

Explanation

Contribution per unit is $20 − $8 = $12. Required units = (fixed costs + target profit) ÷ contribution per unit = ($48,000 + $24,000) ÷ $12 = 6,000 units.

Question 10Fundamentals

Budgeted overheads are $180,000 and budgeted activity is 45,000 machine hours. What is the predetermined overhead absorption rate per machine hour?

  1. $2.50
  2. $4.00 Correct answer.
  3. $9.00
  4. $0.25

Explanation

The predetermined absorption rate is budgeted overhead divided by budgeted activity: $180,000 ÷ 45,000 machine hours = $4.00 per machine hour. It is set in advance so that overheads can be absorbed as production takes place.

Question 11Fundamentals

Budgeted overheads were $200,000. Actual overheads incurred were $212,000 and overheads absorbed were $205,000. What is the over- or under-absorption for the period?

  1. Over-absorbed by $12,000
  2. Under-absorbed by $7,000 Correct answer.
  3. Over-absorbed by $7,000
  4. Under-absorbed by $5,000

Explanation

Overhead absorbed ($205,000) is compared with overhead actually incurred ($212,000). Absorption falls short by $7,000, so overhead is under-absorbed and the cost of sales must be increased.

Question 12Fundamentals

The standard price of a material is $5.00 per kg. In a period 10,000 kg were purchased and used at an actual price of $5.50 per kg. What is the material price variance?

  1. $2,500 adverse
  2. $5,000 adverse Correct answer.
  3. $500 adverse
  4. $5,000 favourable

Explanation

Material price variance = (standard price − actual price) × quantity used = ($5.00 − $5.50) × 10,000 kg = $5,000 adverse. Paying more than the standard price always produces an adverse variance.

Question 13Fundamentals

Activity levels and total costs were: 8,000 units costing $62,000 and 4,000 units costing $38,000. Using the high-low method, what are the variable cost per unit and the fixed cost?

  1. Variable cost $5 per unit and fixed cost $18,000
  2. Variable cost $6 per unit and fixed cost $38,000
  3. Variable cost $3 per unit and fixed cost $14,000
  4. Variable cost $6 per unit and fixed cost $14,000 Correct answer.

Explanation

Variable cost per unit = change in cost ÷ change in activity = ($62,000 − $38,000) ÷ (8,000 − 4,000) = $6. Fixed cost = $62,000 − (8,000 × $6) = $14,000.

Question 14Fundamentals

Current assets are $90,000, of which inventory is $30,000, and current liabilities are $40,000. What is the current ratio?

  1. 3.00
  2. 1.50
  3. 2.25 Correct answer.
  4. 0.44

Explanation

The current ratio is current assets divided by current liabilities: $90,000 ÷ $40,000 = 2.25. Unlike the quick ratio, it includes inventory.

Question 15Fundamentals

Revenue is $400,000, cost of sales is $240,000 and operating expenses are $90,000. What is the gross profit margin?

  1. 22.5%
  2. 40.0% Correct answer.
  3. 60.0%
  4. 17.5%

Explanation

Gross profit is revenue minus cost of sales ($400,000 − $240,000 = $160,000), so the margin is $160,000 ÷ $400,000 = 40.0%. Operating expenses are deducted after gross profit and do not affect this ratio.

Question 16Fundamentals

A project costs $150,000 and generates cash inflows of $50,000 in year 1, $60,000 in year 2 and $60,000 in year 3. What is the payback period?

  1. 3.00 years
  2. 2.75 years
  3. 2.50 years
  4. 2.67 years Correct answer.

Explanation

Cumulative cash flow reaches $110,000 after two years, leaving $40,000 of the $150,000 outlay to be recovered from the $60,000 received in year three. Payback is therefore 2 + ($40,000 ÷ $60,000) = 2.67 years.

Question 17Fundamentals

Opening inventory was 800 units and closing inventory was 300 units. Fixed production overhead is absorbed at $5 per unit. Compared with marginal costing profit, what will absorption costing profit be?

  1. Equal to the marginal costing profit
  2. $2,500 lower Correct answer.
  3. $2,500 higher
  4. $1,500 higher

Explanation

Under absorption costing, fixed production overhead is carried in inventory. Inventory fell by 500 units, so $2,500 (500 × $5) of fixed overhead previously deferred is released into cost of sales, making absorption profit $2,500 lower than marginal profit.

Question 18Fundamentals

Product A earns a contribution of $10 per unit and uses 2 machine hours; Product B earns $12 per unit and uses 4 machine hours. Machine hours are limited. Which product should be prioritised, and why?

  1. Product A, because it earns the higher contribution per unit
  2. Product B, because it earns the higher contribution per unit of the two products
  3. Product A, because it earns the higher contribution per machine hour Correct answer.
  4. Product B, because it uses more machine hours per unit

Explanation

When a resource is scarce, products are ranked by contribution per unit of the limiting factor. Product A earns $10 ÷ 2 = $5 per machine hour while Product B earns $12 ÷ 4 = $3, so A uses the scarce hours more profitably.

Question 19Fundamentals

A product has a price elasticity of demand of −0.4. If the price is increased by 10%, what will happen?

  1. Quantity demanded rises by 4% and total revenue rises
  2. Quantity demanded falls by 4% and total revenue rises Correct answer.
  3. Quantity demanded falls by 25% and total revenue falls
  4. Quantity demanded falls by 4% and total revenue falls

Explanation

An elasticity of −0.4 means a 10% price rise reduces quantity demanded by 4% (0.4 × 10%). Because the absolute value is below 1, demand is inelastic, so the price rise increases total revenue.

Question 20Fundamentals

Electricity paid during the year was $18,000. The opening accrual was $1,500 and the closing accrual is $2,500. What is the electricity expense for the year?

  1. $20,500
  2. $17,000
  3. $19,000 Correct answer.
  4. $18,000

Explanation

The expense is the amount paid, less the opening accrual already charged in a previous period, plus the closing accrual relating to this period: $18,000 − $1,500 + $2,500 = $19,000.

Question 21Fundamentals

A bank statement shows an overdraft of $2,000. There are unpresented cheques of $1,500 and lodgements not yet credited of $600. What is the balance on the cash book?

  1. Overdraft of $4,100 per the cash book
  2. Positive balance of $1,100 per the cash book
  3. Overdraft of $1,100 per the cash book Correct answer.
  4. Overdraft of $2,900 per the cash book

Explanation

Cash book balance = bank statement balance − lodgements not yet credited + unpresented cheques = −$2,000 − $600 + $1,500 = −$1,100. Unpresented cheques have reduced the bank statement but not yet the cash book, so they are added back.

Question 22Fundamentals

An accountant discovers a material error in a colleague's work and discloses it to an unrelated third party without authority. Which fundamental ethical principle is breached?

  1. Confidentiality Correct answer.
  2. Professional competence and due care
  3. Objectivity
  4. Integrity

Explanation

Confidentiality requires accountants not to disclose information acquired through professional relationships without proper authority or a legal or professional duty to do so. Sharing a colleague's error with an unrelated third party breaches that duty.

Question 23Fundamentals

Set-up costs of $150,000 arise from 300 set-ups and order-handling costs of $80,000 arise from 1,600 orders. A product requires 4 set-ups and 20 orders. Using activity based costing, what overhead is charged to this product?

  1. $1,000
  2. $3,000 Correct answer.
  3. $4,500
  4. $2,000

Explanation

Under activity based costing, overhead is charged by activity: set-ups cost $150,000 ÷ 300 = $500 each and orders cost $80,000 ÷ 1,600 = $50 each. The product absorbs (4 × $500) + (20 × $50) = $3,000.

Question 24Fundamentals

Completed output was 1,800 units and closing work in progress was 400 units, 50% complete. Using the weighted average method, what are the equivalent units of production?

  1. 2,040 units
  2. 2,000 units Correct answer.
  3. 1,800 units
  4. 2,200 units

Explanation

Under the weighted average method, equivalent units = completed output + (closing work in progress × degree of completion) = 1,800 + (400 × 50%) = 2,000 units.

Question 25Fundamentals

A division earns a profit of $120,000 on invested capital of $600,000. A new project would earn $30,000 on capital of $200,000 and the company applies an imputed interest charge of 12%. What is the likely decision?

  1. It is rejected under both ROI and residual income
  2. It is accepted under ROI but rejected under residual income
  3. Rejected under ROI but accepted under residual income Correct answer.
  4. It is accepted under both ROI and residual income

Explanation

Current ROI is 20% and the project earns 15%, which would dilute divisional ROI to 18.75%, so an ROI-managed division rejects it. Residual income rises from $48,000 to $54,000 because the project earns more than the 12% imputed charge, so an RI-managed division accepts it.

Question 26Fundamentals

A business has total assets of $250,000 and total liabilities of $90,000. What is the owner's equity?

  1. $160,000 Correct answer.
  2. $250,000
  3. $90,000
  4. $340,000

Explanation

The accounting equation states that assets equal liabilities plus equity, so equity is assets minus liabilities. Here $250,000 minus $90,000 equals $160,000. Equity is the owner's residual interest in the assets after liabilities.

Question 27Fundamentals

A business purchases office equipment for $5,000 on credit. Which double entry records this transaction?

  1. Debit office equipment $5,000; credit cash $5,000
  2. Debit office equipment $5,000; credit trade payable $5,000 Correct answer.
  3. Debit cash $5,000; credit office equipment $5,000
  4. Debit trade payable $5,000; credit office equipment $5,000

Explanation

Office equipment is an asset, so an increase is debited. Buying on credit creates a trade payable, a liability, so it is credited. Cash is not affected until payment is made.

Question 28Fundamentals

Under the lower of cost and net realisable value rule, how should inventory normally be measured?

  1. The lower of cost and NRV Correct answer.
  2. The higher of cost and NRV
  3. Net realisable value
  4. Cost plus selling costs

Explanation

Inventory is measured at the lower of cost and net realisable value to avoid reporting assets above the amount they can recover. NRV is expected selling price less costs to complete and sell. Using the higher figure could overstate inventory and profit.

Question 29Fundamentals

Which accounting basis recognises revenue when it is earned and expenses when they are incurred, rather than when cash moves?

  1. Consistency
  2. Going concern
  3. Prudence
  4. Accrual basis Correct answer.

Explanation

The accrual basis matches revenue earned with the expenses incurred in the same period. It records transactions when economic events occur, not simply when cash is received or paid. This supports reported profit being linked to activity for the period.

Question 30Fundamentals

A factory's electricity bill includes a fixed standing charge of $2,000 per month plus $0.10 per machine hour. At 10,000 machine hours, what is total electricity cost?

  1. $10,000
  2. $2,000
  3. $3,000 Correct answer.
  4. $1,000

Explanation

This is a semi-variable cost with a fixed and a variable element. The variable element is 10,000 hours multiplied by $0.10, equal to $1,000. Adding the $2,000 fixed charge gives $3,000.

Question 31Fundamentals

A product sells for $25, variable cost is $15 per unit and fixed costs are $30,000. What is the contribution per unit?

  1. $15
  2. $10 Correct answer.
  3. $25
  4. $40

Explanation

Contribution per unit is selling price minus variable cost per unit. Here $25 minus $15 equals $10 per unit. Fixed costs affect total profit and break-even, but not contribution per unit.

Question 32Fundamentals

A company uses marginal costing. Fixed production overhead of $40,000 is incurred. How is it treated in inventory valuation?

  1. Included in inventory at a predetermined rate
  2. Written off in full to profit in the period Correct answer.
  3. Apportioned between cost of sales and inventory
  4. Carried forward as a deferred asset

Explanation

Under marginal costing, inventory is valued using variable production costs only. Fixed production overhead is treated as a period cost and charged to profit in the period incurred. It is not carried forward inside inventory.

Question 33Fundamentals

A business has inventory of $40,000, trade receivables of $60,000, trade payables of $30,000 and a bank overdraft of $10,000. What is its working capital?

  1. $60,000 Correct answer.
  2. $140,000
  3. $100,000
  4. $90,000

Explanation

Working capital is current assets minus current liabilities. Current assets are $40,000 plus $60,000, equal to $100,000. Current liabilities are $30,000 plus $10,000, equal to $40,000, so working capital is $60,000.

Question 34Fundamentals

A company reports profit before tax of $80,000, depreciation of $15,000 and an increase in trade receivables of $10,000. What is cash generated from operations before tax?

  1. $75,000
  2. $80,000
  3. $105,000
  4. $85,000 Correct answer.

Explanation

Start with profit before tax, add back the non-cash depreciation and deduct the increase in receivables because cash collected is lower than revenue. The calculation is $80,000 plus $15,000 minus $10,000, equal to $85,000.

Question 35Fundamentals

A special order requires 500 kg of material that is used regularly and would be replaced. The material originally cost $4 per kg and its current replacement cost is $5 per kg. What is the relevant material cost for the order?

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

Explanation

Because the material is used regularly and would be replaced, the relevant cost is the current replacement cost. The original cost is a sunk cost and is not relevant to the decision. Thus 500 kg multiplied by $5 equals $2,500.

Question 36Fundamentals

A flexible budget is prepared for 8,000 units, but the actual activity level is 10,000 units. Variable cost is $6 per unit and fixed cost is $20,000. What total cost is shown in the flexible budget at 10,000 units?

  1. $80,000 Correct answer.
  2. $68,000
  3. $100,000
  4. $60,000

Explanation

A flexible budget is adjusted to the actual activity level. Variable cost at 10,000 units is $60,000, and fixed cost remains $20,000. Total budgeted cost is therefore $80,000.

Question 37Fundamentals

A project requires an initial investment of $200,000 and is expected to generate annual accounting profit of $30,000. Using average investment and assuming straight-line depreciation with no residual value, what is the accounting rate of return?

  1. 30% Correct answer.
  2. 20%
  3. 10%
  4. 15%

Explanation

Average investment is the average of the initial $200,000 and the $0 residual value, equal to $100,000. The accounting rate of return is annual accounting profit divided by average investment. Thus $30,000 divided by $100,000 equals 30%.

Question 38Fundamentals

A company issues 100,000 ordinary shares of $1 each at $3 per share. What is the effect on share capital and share premium?

  1. Capital $100,000; premium $300,000
  2. Capital $300,000; premium $0
  3. Capital $100,000; premium $200,000 Correct answer.
  4. Capital $200,000; premium $100,000

Explanation

Share capital is recorded at the nominal value of the shares issued, which is 100,000 shares multiplied by $1, equal to $100,000. The excess over nominal value is share premium, equal to 100,000 shares multiplied by $2, giving $200,000. Total proceeds are therefore $300,000.

Question 39Fundamentals

Standard labour hours for actual output are 1,200. Actual hours worked were 1,250 and the standard rate is $12 per hour. What is the labour efficiency variance?

  1. $3,000 favourable
  2. $600 adverse Correct answer.
  3. $3,000 adverse
  4. $600 favourable

Explanation

The labour efficiency variance is standard hours for actual output minus actual hours, multiplied by the standard rate. Here 1,200 minus 1,250 equals negative 50 hours, and negative 50 multiplied by $12 equals a $600 adverse variance. It is adverse because more hours were worked than the standard allows.

Question 40Fundamentals

A product has an income elasticity of demand of +2.0. If consumer incomes rise by 5%, what is the expected change in quantity demanded?

  1. Rises by 10% Correct answer.
  2. Falls by 10%
  3. Remains unchanged
  4. Rises by 2.5%

Explanation

Income elasticity of demand equals the percentage change in quantity demanded divided by the percentage change in income. Rearranging gives quantity change equal to 2.0 multiplied by 5%, which is 10%. The positive sign means demand rises as income rises.

Question 41Investments

A company is appraising a conventional independent project using discounted cash flow. According to the NPV rule, the project should be accepted when its net present value is:

  1. greater than zero Correct answer.
  2. less than the initial cost
  3. equal to the discount rate
  4. greater than the payback period

Explanation

A positive NPV means the present value of cash inflows exceeds the present value of cash outflows, so the project adds value to the company. The decision rule is to accept independent projects with NPV above zero.

Question 42Investments

Payback period is best described as the time required for:

  1. the project's NPV becomes positive
  2. the IRR falls below the cost of capital
  3. accounting profits equal the original investment
  4. cash inflows to recover the initial outlay Correct answer.

Explanation

Payback measures how long it takes for cumulative cash inflows to equal the initial cash outflow. It focuses on cash recovery and ignores the time value of money unless discounted payback is used.

Question 43Investments

The internal rate of return of an investment is the discount rate at which:

  1. the project's NPV is zero Correct answer.
  2. cash inflows equal accounting profits
  3. payback equals the project life
  4. the profitability index is zero

Explanation

The IRR is the discount rate that makes the present value of cash inflows equal the present value of cash outflows, so NPV is zero. It is compared with the required rate of return to decide on acceptance.

Question 44Investments

Which item is normally excluded from a project's relevant cash flows because it is a sunk cost?

  1. Additional working capital required
  2. Tax saved on capital allowances
  3. Completed feasibility study cost Correct answer.
  4. Lost rental income from an owned site

Explanation

A sunk cost has already been incurred and cannot be changed by the investment decision, so it is not relevant. Future incremental cash flows, including opportunity costs and tax effects, are relevant.

Question 45Investments

A project requires an initial cash outflow of $120,000 and is expected to generate constant annual cash inflows of $30,000. Its simple payback period is:

  1. 2.5 years
  2. 3.0 years
  3. 6.0 years
  4. 4.0 years Correct answer.

Explanation

Simple payback is the initial outlay divided by the constant annual cash inflow: $120,000 ÷ $30,000 = 4.0 years. No discounting is applied in simple payback.

Question 46Investments

An investment of $100,000 today produces a single cash inflow of $112,000 in one year. At a discount rate of 10%, the NPV is closest to:

  1. $1,818 Correct answer.
  2. $101,818
  3. $12,000
  4. $10,000

Explanation

The present value of the inflow is $112,000 ÷ 1.10 = $101,818. The NPV is $101,818 − $100,000 = $1,818.

Question 47Investments

For a series of equal annual cash flows starting in one year, the appropriate discount factor is the:

  1. profitability index
  2. single-period discount factor
  3. capital recovery factor
  4. annuity discount factor Correct answer.

Explanation

Equal annual cash flows form an annuity, so their present value is found using the annuity discount factor for the relevant rate and number of periods. A single-period factor discounts only one cash flow.

Question 48Investments

Hard capital rationing occurs when a company's investment spending is limited by:

  1. management's own maximum project size
  2. a voluntary internal spending cap
  3. a shortage of external finance Correct answer.
  4. a temporary shortage of acceptable projects

Explanation

Hard capital rationing arises from external constraints, such as lenders or investors being unwilling to provide sufficient finance. Soft rationing is imposed internally by management policy.

Question 49Investments

A project requires an average investment of $200,000 and is expected to generate average annual accounting profit of $25,000. Its accounting rate of return is:

  1. 25.0%
  2. 12.5% Correct answer.
  3. 8.0%
  4. 20.0%

Explanation

ARR is average annual accounting profit divided by average investment: $25,000 ÷ $200,000 = 12.5%. It is based on accounting profit rather than cash flow.

Question 50Investments

A project has an NPV of +$20,000 at a discount rate of 10% and an NPV of -$10,000 at 15%. Using linear interpolation, the IRR is approximately:

  1. 13.3% Correct answer.
  2. 11.7%
  3. 12.5%
  4. 16.7%

Explanation

Interpolation gives 10% + [20,000 ÷ (20,000 + 10,000)] × 5% = 13.3%. The IRR lies between the two rates, closer to 10% because the positive NPV is larger in absolute terms.