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CMA Final Paper 19 study materials
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CMA Final Paper 19 practice questions

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Question 1Strategic Management

In strategic management, which term describes the gap between a firm's current performance and the performance it would achieve if it fully exploited its existing resources and capabilities?

  1. Opportunity gap Correct answer.
  2. Resource gap
  3. Strategic fit
  4. Competitive parity

Explanation

The opportunity gap measures the improvement available from better deployment of resources already held, before any new capability building. It is distinguished from the resource gap, which concerns capabilities the firm lacks entirely. Closing it is usually the fastest route to value creation.

Question 2Strategic Management

A conglomerate's corporate parent adds value to its business units mainly by applying a common planning and capital-allocation discipline. Which parenting style does this most closely match?

  1. Central services parent
  2. Strategic planning parent Correct answer.
  3. Financial control parent
  4. Strategic control parent

Explanation

A strategic planning parent coordinates and shapes unit strategies centrally, imposing common planning processes and investment criteria. Financial control parents leave strategy to units and judge them on results, while central services parents mainly share functional services. The emphasis on common planning discipline is the defining feature here.

Question 3Strategic Management

In Porter's five forces framework, which condition most directly increases the threat of substitutes?

  1. High fixed costs in the incumbent industry
  2. Few alternative products that serve the same underlying need
  3. Strong brand loyalty among incumbent customers
  4. Low switching costs for buyers combined with a favourable price-performance trend in the substitute Correct answer.

Explanation

Substitutes become threatening when buyers can switch cheaply and when the alternative's price-performance ratio is improving. High fixed costs and brand loyalty are incumbent defences, not substitute drivers. The number of alternatives serving the need also matters, and few alternatives weakens the threat.

Question 4Strategic Management

A firm sells its only manufacturing plant and simultaneously signs a long-term agreement to buy the same components from the purchaser. Which transaction does this best illustrate?

  1. An outsourcing arrangement with no asset transfer
  2. A leveraged buyout
  3. A vertical merger with a supplier
  4. A sale-and-leaseback of physical assets Correct answer.

Explanation

Sale-and-leaseback involves disposing of an asset while retaining its use through a long-term contract, releasing capital tied up in fixed assets. The buyer becomes both owner and supplier, which is why the arrangement resembles outsourcing but includes an asset transfer. A vertical merger would combine ownership rather than separate it.

Question 5Strategic Management

Which statement best captures the logic of the resource-based view of the firm?

  1. Industry structure alone determines the profitability of every firm within it.
  2. Firms should always pursue the lowest-cost position available in their industry.
  3. Competitive advantage is determined primarily by the pace of new product launches.
  4. Sustainable advantage flows from resources that are valuable, rare, hard to imitate and organisationally supported. Correct answer.

Explanation

The resource-based view explains persistent performance differences through heterogeneous resources meeting the VRIN or VRIO tests. Industry structure matters, but it cannot explain why firms in the same industry earn different returns. Cost leadership and innovation speed are strategies, not the core logic of the theory.

Question 6Strategic Management

A retailer's board wants a governance mechanism that ties executive reward to long-run shareholder value rather than short-term profit. Which design best fits that intent?

  1. Annual cash bonuses based on quarterly earnings per share
  2. A fixed salary with no performance element
  3. Bonuses linked to revenue growth in the current quarter
  4. Executive share options with a three-year vesting period and clawback provisions Correct answer.

Explanation

Deferred equity with vesting and clawback aligns managers with multi-year value creation and discourages short-term manipulation. Quarterly or revenue-based bonuses reward exactly the short-termism the board wants to avoid. A fixed salary removes incentive alignment altogether.

Question 7Strategic Management

Which of the following is the clearest example of a firm pursuing a differentiation strategy rather than cost leadership?

  1. A furniture maker investing in unique design and a flagship showroom experience Correct answer.
  2. A cement producer locating plants near quarries to minimise transport cost
  3. A supermarket negotiating volume discounts to undercut local rivals
  4. A budget airline removing frills to offer the lowest fares on each route

Explanation

Differentiation rests on attributes buyers value enough to pay a premium, such as distinctive design and retail experience. The other options all reduce cost position to compete on price. Differentiation need not ignore cost, but its primary basis of advantage is perceived uniqueness.

Question 8Strategic Management

A pharmaceutical firm licenses its patented compound to a local partner in a country where it has no distribution capability. Which entry mode does this represent?

  1. A wholly owned greenfield subsidiary
  2. A joint venture with shared equity
  3. A contractual licensing arrangement Correct answer.
  4. A franchising arrangement

Explanation

Licensing grants rights to use intellectual property in return for fees or royalties without equity investment. It suits situations where the firm lacks local capability and wants limited capital exposure. Greenfield and joint ventures involve equity ownership, and franchising is a retail-format arrangement.

Question 9Strategic Management

A firm's value chain analysis shows that after-sales service creates more customer value per unit of cost than any other activity. What is the most appropriate strategic implication?

  1. Outsource after-sales service to the lowest bidder to reduce overhead
  2. Treat after-sales service as a distinctive capability and invest to reinforce it Correct answer.
  3. Reduce service quality to bring it in line with competitors
  4. Reallocate resources away from service toward manufacturing

Explanation

Activities that generate disproportionate value relative to cost are candidates for becoming sources of advantage and deserve reinforcement. Outsourcing to the lowest bidder risks eroding the very capability that differentiates the firm. Levelling down to competitors would forfeit the advantage.

Question 10Strategic Management

In Ansoff's product-market matrix, a firm selling its existing products to entirely new customer segments is pursuing which option?

  1. Diversification
  2. Market penetration
  3. Product development
  4. Market development Correct answer.

Explanation

Market development means taking current products into new markets or segments. Penetration grows share in existing markets, product development creates new products for existing markets, and diversification changes both dimensions at once. The stem changes only the market dimension.

Question 11Strategic Management

A diversified group's businesses share few customers, channels or technologies, but the corporate centre argues that common risk is reduced because their cash flows are uncorrelated. Which critique of this argument is most defensible?

  1. Shareholders can usually diversify risk more cheaply through capital markets, so risk-spreading alone rarely justifies a corporate parent Correct answer.
  2. Conglomerates cannot legally hold businesses in unrelated industries
  3. Uncorrelated cash flows make the group more exposed to a single industry downturn
  4. Diversification always destroys value because shareholders cannot diversify themselves

Explanation

Investors can hold diversified portfolios at low cost, so corporate diversification justified only by risk reduction generally fails to add value. A parent must show parenting advantage beyond what capital markets provide. The absolute claim that diversification always destroys value is too strong, and legal barriers do not exist.

Question 12Strategic Management

A firm's strategy document states a goal of 'becoming the most innovative company in our sector by 2030'. Which criticism of this objective is most consistent with good-practice strategic objectives?

  1. It specifies a time horizon, which strategic objectives should avoid
  2. It is too precise and should be made vaguer to allow flexibility
  3. It lacks measurable criteria and a clear basis for tracking progress Correct answer.
  4. It refers to innovation, which cannot be part of a strategic objective

Explanation

Strategic objectives should be specific and measurable so that progress can be monitored and resources allocated. A slogan such as 'most innovative' gives no metric or benchmark. Time horizons are appropriate, and innovation is a legitimate strategic theme.

Question 13Strategic Management

Which factor in the macro-environment would a PESTEL analysis classify as 'legal' rather than 'political'?

  1. An increase in the central bank's policy interest rate
  2. Public opinion shifting against single-use plastics
  3. A change in government subsidies for renewable energy
  4. New data protection legislation imposing compliance duties on firms Correct answer.

Explanation

Legal factors are enacted statutes, regulations and case law that create binding obligations, such as data protection rules. Subsidies and public opinion are political and social factors respectively. Interest rates belong to the economic category.

Question 14Strategic Management

A firm's culture strongly rewards cost control and risk avoidance. Its new strategy requires rapid experimentation and tolerance of failure. What does this mismatch most likely indicate?

  1. The strategy is automatically invalid and should be abandoned
  2. The firm should immediately dismiss employees who resist change
  3. Culture has no bearing on strategy execution
  4. There is a strategic-culture gap that must be addressed for implementation to succeed Correct answer.

Explanation

When prevailing values and behaviours conflict with the requirements of a chosen strategy, implementation typically stalls. The gap can be closed by shifting incentives, leadership signals and routines, or by revising the strategy. Dismissing the strategy or the staff outright is a disproportionate response.

Question 15Strategic Management

In a BCG growth-share matrix, a business unit with high market growth and a high relative market share is classified as which?

  1. Question mark
  2. Dog
  3. Star Correct answer.
  4. Cash cow

Explanation

Stars combine high growth with high relative share and typically require investment to hold position. Cash cows have high share in low-growth markets, question marks have low share in high-growth markets, and dogs have low share in low-growth markets. The classification follows the two axes directly.

Question 16Strategic Management

A firm decides to enter a foreign market by acquiring a local competitor with an established distribution network. Which advantage does this entry mode offer relative to a greenfield investment?

  1. It guarantees lower total cost than organic growth
  2. It provides immediate market presence and local capabilities Correct answer.
  3. It avoids all integration risk
  4. It requires no cultural adaptation by the acquirer

Explanation

Acquisition buys speed and access to existing channels, customers and local know-how that greenfield entry must build from scratch. It does not eliminate integration risk, which is often the main cost. Cultural adaptation and cost superiority are not assured.

Question 17Strategic Management

Which of the following best describes the concept of 'strategic intent' as used in strategic management?

  1. An ambitious long-term aspiration that stretches the organisation beyond its current resources Correct answer.
  2. A detailed annual budget approved by the finance function
  3. A legal statement of the firm's registered objectives
  4. A short-term operational plan for a single department

Explanation

Strategic intent captures an ambitious, long-horizon aspiration that creates tension between current resources and desired position, driving capability building. It is not a budget, an operational plan or a legal document. Its purpose is to focus and stretch the whole organisation.

Question 18Strategic Management

A firm competes in an industry where buyer switching costs are low, products are undifferentiated and fixed costs are high. Which competitive dynamic does this combination most strongly suggest?

  1. Weak rivalry and high margins
  2. A monopoly position for the largest player
  3. Rising barriers to entry
  4. Intense price competition and pressure on profitability Correct answer.

Explanation

Low switching costs and undifferentiated products push buyers to compete on price, while high fixed costs create pressure to fill capacity. Together these conditions intensify rivalry and compress margins. They do not create monopoly power or raise entry barriers.

Question 19Strategic Management

A strategic business unit is granted authority to set its own competitive strategy but must justify major capital requests to the corporate centre. This arrangement best illustrates which structural approach?

  1. A network structure with no formal hierarchy
  2. A pure functional structure with centralised decision-making
  3. A matrix structure with dual reporting lines
  4. A multidivisional structure with decentralised operating autonomy and central capital control Correct answer.

Explanation

Multidivisional structures delegate operating and competitive decisions to divisions while the centre retains capital allocation and performance monitoring. The stem shows exactly this split of autonomy and control. A functional structure centralises decisions, and matrix or network forms are not described.

Question 20Strategic Management

In a competitive intelligence context, which activity is most consistent with ethical practice?

  1. Posing as a customer to obtain a rival's confidential pricing data
  2. Accessing a rival's private systems without authorisation
  3. Collecting publicly filed annual reports and analysing them systematically Correct answer.
  4. Bribing a competitor's employee for internal documents

Explanation

Systematic analysis of public disclosures such as annual reports is a legitimate and widely used intelligence method. Deception, bribery and unauthorised access breach legal and ethical standards. Competitive intelligence must rely on lawful, transparent sources.

Question 21Strategic Management

A manufacturer's strategy is to build a proprietary ecosystem of interoperable devices so that customers face high switching costs once they own several products. Which source of competitive advantage does this primarily exploit?

  1. Regulatory protection through patents
  2. Absolute cost advantage through scale economies
  3. Customer lock-in generated by complementary products Correct answer.
  4. Access to scarce raw materials

Explanation

Interoperable ecosystems raise switching costs as customers accumulate complementary products, creating lock-in. Scale economies, patents and raw material access are different sources of advantage. The stem emphasises the cost to customers of leaving the ecosystem.

Question 22Strategic Management

A firm's board is assessing whether to divest a business unit. Which consideration is most directly a strategic rather than a financial divestment rationale?

  1. The unit generates a positive accounting profit this year
  2. The unit's disposal price exceeds its book value
  3. The unit no longer fits the group's core focus and consumes management attention Correct answer.
  4. The disposal would reduce the group's reported debt

Explanation

Strategic divestment rationale centres on fit with corporate purpose, portfolio coherence and management focus. Price versus book value, reported profit and debt reduction are financial considerations. The question asks which reason is strategic in nature.

Question 23Strategic Management

Which statement best explains why a firm might deliberately choose a 'focused' generic strategy rather than a broad one?

  1. It intends to compete solely on the lowest price across all segments
  2. It wants to serve a narrow segment particularly well and accepts a smaller addressable market Correct answer.
  3. It plans to avoid making any choices about its target customers
  4. It aims to sell to every customer segment in the industry

Explanation

A focus strategy targets a narrow segment and tailors the offer to its specific needs, accepting a smaller market in exchange for deeper fit. Broad strategies address many segments, and avoiding choices altogether is the opposite of strategic positioning.

Question 24Strategic Management

A firm's managers systematically overestimate the likelihood of success for a major acquisition and underestimate integration difficulties. Which cognitive bias does this most clearly illustrate?

  1. Sunk cost fallacy
  2. Status quo bias in decision framing
  3. Anchoring on the first offer price
  4. Overconfidence and the planning fallacy Correct answer.

Explanation

Overconfidence leads decision-makers to overrate their forecasts, and the planning fallacy describes systematic underestimation of time, cost and difficulty. Anchoring concerns reliance on an initial reference point, status quo bias favours inaction, and sunk cost fallacy concerns past spending. The stem describes optimistic forecasting errors.

Question 25Strategic Management

A firm's balanced scorecard includes a measure of employee training hours completed per year alongside customer satisfaction and financial return measures. Which perspective of the scorecard does the training measure represent?

  1. Internal business process perspective
  2. Learning and growth perspective Correct answer.
  3. Financial perspective
  4. Customer perspective

Explanation

The learning and growth perspective covers human capital, skills, information systems and organisational culture that enable future performance. Customer satisfaction sits in the customer perspective, and financial returns in the financial perspective. Training hours are a human-capital input measure.

Question 26Strategic Management

A conglomerate's corporate parent adds value to its business units mainly by negotiating favourable financing terms centrally and by rotating managers between units. In parenting-strategy terms, how is this corporate role best characterised?

  1. As a portfolio manager whose main contribution is capital allocation and financial discipline Correct answer.
  2. As a hands-off holding company that deliberately adds no value to its units
  3. As a parental developer whose main contribution is transferring central capabilities to units
  4. As a synergy manager whose main contribution is cross-unit sharing of activities and resources

Explanation

Parenting strategy distinguishes the value the centre adds: portfolio management relies on financial control, capital allocation and management rotation rather than on shared activities or transferred skills. Because the described contribution is central financing and managerial rotation, it fits the portfolio-manager style.

Question 27Strategic Management

A national airline's managers describe their strategy as 'being the preferred full-service carrier for business travellers on long-haul routes'. Which element of a well-formed strategy statement is most clearly missing?

  1. A statement of the competitive advantage that will make the airline preferred Correct answer.
  2. A specification of the long-haul routes the airline will operate
  3. A definition of the geographic scope of the markets it will serve
  4. An identification of the customer segment the airline will target

Explanation

A complete strategy statement typically specifies objectives, scope and advantage. The airline names its target segment and its long-haul scope, but it never says why business travellers would prefer it over rivals, so the advantage component is absent.

Question 28Strategic Management

A firm's five-forces analysis concludes that supplier power is high because a single component maker holds patents that no rival can legally copy. Which strategic response most directly addresses this specific pressure?

  1. Extending payment terms with distributors to improve working capital
  2. Designing the component out of future products or sponsoring an alternative standard Correct answer.
  3. Increasing advertising spend to strengthen brand loyalty among end customers
  4. Reducing the number of product variants offered to lower inventory complexity

Explanation

High supplier power rooted in patented, non-substitutable inputs is best countered by reducing dependence on that supplier, for example through redesign or by backing an alternative technology standard. Advertising, SKU reduction and payment terms do not alter the underlying bargaining asymmetry.

Question 29Strategic Management

A regional brewer uses a resource-based view to assess its assets. Which attribute would most strongly support a claim that its century-old brand is a source of sustained competitive advantage?

  1. The brand is well known and has been consistently supported by large advertising budgets
  2. The brand is recognised by most consumers in the region where the brewer operates
  3. The brand is valuable to customers and is protected by a registered trademark
  4. The brand is historically unique, hard to imitate and embedded in local distribution relationships Correct answer.

Explanation

Sustained advantage under the resource-based view requires value plus rarity, inimitability and non-substitutability. Historical uniqueness combined with embedded distribution relationships is difficult for rivals to replicate, whereas mere awareness or legal protection does not by itself prevent imitation.

Question 30Strategic Management

A software firm's leaders want the organisation to respond faster to customer needs. Which change is most consistent with shifting decision rights under a strategy-execution lens?

  1. Centralising all release approvals in the executive committee to ensure consistency
  2. Requiring every product decision to be documented in a monthly board paper
  3. Delegating release decisions to cross-functional product teams with clear outcome targets Correct answer.
  4. Creating a new layer of middle managers to review each team's release plans

Explanation

Executing a responsiveness strategy requires decision rights to sit where customer information is richest, supported by clear outcome accountability. Delegation to cross-functional teams with defined targets moves authority closer to the customer and avoids approval bottlenecks.

Question 31Strategic Management

A firm's managers forecast demand for a new product by extrapolating the rapid growth of a similar past launch, ignoring evidence that the market has since matured. Which cognitive bias does this most clearly illustrate?

  1. Groupthink suppressing dissenting views
  2. Illusion of control over external events
  3. Escalation of commitment to a failing course
  4. Anchoring on an unrepresentative reference case Correct answer.

Explanation

Anchoring occurs when a decision is tied to an initial reference point, such as a past launch, and adjusted insufficiently even when new evidence shows conditions differ. Ignoring the market's maturation because of that reference point is a classic anchoring effect.

Question 32Strategic Management

A diversified manufacturer wants to create economies of scope between two divisions. Which initiative is the clearest example of sharing an activity rather than merely transferring a skill?

  1. Circulating best-practice maintenance manuals between divisions
  2. Combining both divisions' outbound logistics into one distribution network Correct answer.
  3. Moving a talented plant manager from one division to the other
  4. Holding an annual conference where division managers exchange ideas

Explanation

Sharing an activity means the same value-chain function is performed jointly, so merging outbound logistics into one network physically combines operations. Transferring a manager, circulating manuals or hosting conferences spread knowledge but do not share the activity itself.

Question 33Strategic Management

A firm enters a foreign market by forming a joint venture with a local partner. Which condition most strongly favours a joint venture over a wholly owned subsidiary?

  1. The firm's proprietary technology is easily codified and can be licensed at low cost
  2. Local regulations restrict foreign ownership and local knowledge is essential to operate Correct answer.
  3. The host country has low political risk and fully liberalised foreign investment rules
  4. Transport costs are high relative to product value, favouring local production

Explanation

Joint ventures suit situations where ownership restrictions or the need for local knowledge make full control impossible or costly. When technology is easily licensed, licensing is cheaper, and liberalised rules with low risk make wholly owned entry more feasible.

Question 34Strategic Management

A premium fashion house deliberately keeps production volumes limited and destroys unsold stock rather than discounting it. Which strategic logic best explains this policy?

  1. Minimising inventory holding costs across the product range
  2. Reducing exposure to supplier power in the fabric supply chain
  3. Protecting scarcity and brand exclusivity that underpin premium pricing Correct answer.
  4. Maximising short-term revenue from every unit produced

Explanation

For luxury goods, exclusivity is the source of pricing power, so restricting supply and avoiding discount channels protects brand value even at the cost of destroyed inventory. The policy sacrifices revenue and raises costs, which only makes sense as investment in scarcity.

Question 35Strategic Management

A firm's strategy map shows that improving employee skills is expected to raise process quality, which in turn raises customer satisfaction and ultimately revenue growth. Which feature of the balanced scorecard does this chain illustrate?

  1. A ranking of financial measures above non-financial measures in importance
  2. A budgeting tool that allocates capital across the four perspectives
  3. A causal chain linking learning and growth to internal process, customer and financial outcomes Correct answer.
  4. A compliance checklist that verifies each perspective is measured independently

Explanation

Strategy maps in the balanced scorecard express cause-and-effect links from the learning and growth perspective through internal processes and customers to financial results. The described chain is exactly that causal architecture, not a ranking or an independent checklist.

Question 36Strategic Management

An established firm faces a disruptive entrant selling a simpler, cheaper product to overlooked customers. Which response is most consistent with disruptive-innovation theory?

  1. Lobbying for regulation that raises the minimum specification of competing products
  2. Cutting prices across the full product line to match the entrant immediately
  3. Setting up a separate unit with its own metrics to pursue the lower-end opportunity Correct answer.
  4. Adding premium features to the core product to defend the most profitable customers

Explanation

Disruptive-innovation theory warns that incumbent metrics and processes systematically starve low-margin disruptive ventures, so a separate unit with appropriate metrics is the recommended response. Feature upgrades, regulatory barriers and across-the-board price cuts either ignore the low end or damage the core business.

Question 37Strategic Management

A firm's directors must decide whether to approve a takeover that would substantially increase the chief executive's personal empire and pay. Which governance arrangement best mitigates the resulting agency problem?

  1. Assurance from the chief executive that the deal meets the firm's strategic criteria
  2. A review by the internal audit function of the deal's accounting treatment
  3. Approval by an independent board committee advised separately from the executive team Correct answer.
  4. A shareholder vote at the annual general meeting held after the deal has closed

Explanation

Agency problems in acquisitions are mitigated when independent directors, with their own advisers, evaluate the deal free of executive influence. Post-completion ratification, self-certification and accounting review do not remove the conflict of interest at the decision point.

Question 38Strategic Management

Two competitors each consider whether to cut price. Each earns more if both hold price than if both cut, but each earns most if it cuts while the other holds. In a one-shot simultaneous game with full information, what does game theory predict?

  1. The outcome is indeterminate, because no player has a dominant strategy
  2. One cuts and one holds, because the players can coordinate their roles
  3. Both cut price, because cutting is the dominant strategy for each player Correct answer.
  4. Both hold price, because that outcome maximises the joint payoff

Explanation

This is a prisoner's dilemma: whatever the rival does, each player gains by cutting, so cutting is dominant and the Nash equilibrium is mutual price cutting even though both would prefer to hold. Joint payoff maximisation requires enforceable cooperation, which a one-shot game lacks.

Question 39Strategic Management

A firm's managers assess a proposed diversification by asking whether its existing brands and distribution channels would raise the new business's cash flows. Which test of diversification does this question apply?

  1. The better-off test Correct answer.
  2. The industry-attractiveness test
  3. The cost-of-entry test
  4. The stakeholder-acceptability test

Explanation

The better-off test asks whether the business would gain more from being part of the corporate whole than it would stand-alone, which is precisely what leveraging existing brands and channels assesses. The cost-of-entry test concerns the price of entering, and industry attractiveness concerns the target sector's returns.

Question 40Strategic Management

A firm's stated strategy is to be a low-cost producer, yet its operations managers are rewarded primarily for rapid customisation of orders. What is the most likely consequence for strategy execution?

  1. The strategy will be unaffected because reward systems do not influence behaviour
  2. Customisation will automatically lower unit costs through greater scale economies
  3. Reward systems will pull behaviour away from the cost discipline the strategy requires Correct answer.
  4. Managers will spontaneously align their behaviour with the stated low-cost goal

Explanation

Strategy execution depends on alignment between the stated strategy and the incentives that actually guide behaviour. Rewarding customisation encourages variety and complexity that raise costs, so the reward system contradicts and undermines the low-cost intent.

Question 41Financial Accounting and Reporting

Under IFRS, at what amount is a non-current asset initially measured when acquired in an exchange transaction that lacks commercial substance?

  1. Carrying amount of the asset given up, adjusted for any cash transferred Correct answer.
  2. Fair value of the asset given up, adjusted for any cash transferred
  3. Fair value of the asset received, as evidenced by the transaction
  4. Replacement cost of the asset received at the acquisition date

Explanation

IAS 16 requires that when an exchange transaction lacks commercial substance, the new asset is measured at the carrying amount of the asset given up, adjusted for any cash consideration transferred. Fair value is used only when the exchange has commercial substance or fair values are reliably measurable.

Question 42Financial Accounting and Reporting

A company's financial statements are authorized for issue on 20 March 2025 and the reporting date is 31 December 2024. On 5 March 2025 the company received information that a customer owing 400,000 had been declared insolvent on 15 December 2024. How should this be treated under IAS 10?

  1. Disclose only, since the event was received after year-end
  2. Recognize the loss in 2025 and restate 2024 comparatives
  3. Recognize the loss in 2025 as the information arrived after year-end
  4. Adjust the receivable and recognize the impairment loss in 2024 Correct answer.

Explanation

IAS 10 treats an event as adjusting if it provides evidence of conditions existing at the reporting date. The customer's insolvency condition existed on 15 December 2024, so the receivable must be adjusted in the 2024 financial statements.

Question 43Financial Accounting and Reporting

Which statement best describes the recognition criterion for a provision under IAS 37?

  1. A contingent asset that is virtually certain to be realized
  2. A future operating loss expected from a restructuring plan approved after year-end
  3. A possible obligation whose existence will be confirmed only by uncertain future events
  4. A present obligation arising from a past event, probable outflow, and reliable estimate Correct answer.

Explanation

IAS 37 requires a present obligation from a past event, a probable outflow of resources, and a reliable estimate before a provision is recognized. Possible obligations are contingent liabilities that are only disclosed.

Question 44Financial Accounting and Reporting

Under IFRS 15, a contract with a customer contains a 30-day right of return. At the point of sale, how does the entity account for the expected returns?

  1. Defer all revenue until the return period expires
  2. Recognize revenue only for the amount expected to be retained, with a refund liability and right-of-return asset Correct answer.
  3. Recognize full revenue and reduce cost of sales for expected returns
  4. Recognize full revenue and a separate provision for warranty costs

Explanation

IFRS 15 requires revenue to be recognized only to the extent it is highly probable there will be no significant reversal. The entity recognizes a refund liability and a right-of-return asset for the expected returned goods.

Question 45Financial Accounting and Reporting

An entity issues a convertible bond with a face value of 1,000,000 for proceeds of 1,000,000. The fair value of the liability component without conversion is 900,000. Under IAS 32, how is the instrument initially recognized?

  1. Liability 900,000; equity component 100,000 Correct answer.
  2. Liability 1,000,000; no equity component
  3. Equity 1,000,000; no liability component
  4. Liability 1,000,000; equity component 100,000

Explanation

IAS 32 requires the issuer to split a compound instrument into liability and equity components. The liability is measured first at fair value (900,000), with the residual 100,000 allocated to equity.

Question 46Financial Accounting and Reporting

Which of the following is the correct treatment of borrowing costs under IAS 23 for a qualifying asset?

  1. Capitalize borrowing costs that are directly attributable to acquisition, construction, or production Correct answer.
  2. Recognize borrowing costs in other comprehensive income until the asset is ready for use
  3. Capitalize all borrowing costs regardless of the purpose of the borrowing
  4. Expense all borrowing costs as incurred in profit or loss

Explanation

IAS 23 requires capitalization of borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset. Other borrowing costs are expensed.

Question 47Financial Accounting and Reporting

A company uses the revaluation model for a class of machinery under IAS 16. The carrying amount is 500,000 and the fair value is 560,000. A prior revaluation surplus of 30,000 exists for the same asset. How is the increase recognized?

  1. Recognize 60,000 in profit or loss
  2. Recognize 60,000 in other comprehensive income Correct answer.
  3. Recognize 60,000 as a deferred gain
  4. Recognize 30,000 in profit or loss and 30,000 in OCI

Explanation

An increase in carrying amount under the revaluation model is recognized in OCI and accumulated in equity as a revaluation surplus, unless it reverses a previous decrease recognized in profit or loss. Here no prior decrease exists, so the full 60,000 goes to OCI.

Question 48Financial Accounting and Reporting

Under IAS 36, when should an entity test goodwill for impairment?

  1. Only on acquisition of a subsidiary
  2. Every reporting period end regardless of indicators
  3. Only when there is an indication of impairment
  4. Annually, and whenever there is an indication of impairment Correct answer.

Explanation

IAS 36 requires goodwill and intangible assets with indefinite useful lives to be tested annually, and additionally whenever there is an indication of impairment. Other assets are tested only when indicators exist.

Question 49Financial Accounting and Reporting

Under IFRS 16, how does a lessee initially measure a lease liability?

  1. At the fair value of the underlying asset
  2. At the present value of lease payments not paid at the commencement date Correct answer.
  3. At the total undiscounted lease payments over the lease term
  4. At the carrying amount of the right-of-use asset

Explanation

IFRS 16 requires the lease liability to be measured at the present value of lease payments not paid at the commencement date, discounted using the interest rate implicit in the lease or the lessee's incremental borrowing rate.

Question 50Financial Accounting and Reporting

An entity's deferred tax liability arises from a temporary difference of 200,000, and the tax rate is expected to be 25% when the difference reverses. The enacted rate is currently 30%. Under IAS 12, what amount is recognized?

  1. 60,000 using the current enacted rate
  2. 0, because deferred tax is only recognized on losses
  3. 50,000 using the current rate and 10,000 disclosed in OCI
  4. 50,000 using the expected reversal rate Correct answer.

Explanation

IAS 12 requires deferred tax to be measured at the tax rates expected to apply when the asset is realized or the liability settled, based on enacted or substantively enacted rates. The expected reversal rate of 25% is therefore applied.