Mixed Deck — All CIMA Topics Flashcards

Under the accruals basis, revenue from a service contract completed in December but invoiced in January should be recognized:

Answer: In December when the service was completed

The accruals concept requires revenue to be recognized when earned (service completed in December), regardless of when the invoice is issued or cash received.

In US taxation, what is 'depreciation recapture'?

Answer: The inclusion in taxable income of gains attributable to previously claimed depreciation deductions when an asset is sold

Depreciation recapture requires that gains on the sale of an asset, to the extent they reflect previously deducted depreciation, be recognized as ordinary income.

Normal loss in a process account is valued at:

Answer: Net realizable value (scrap value)

Normal loss is valued at its scrap/net realizable value; its cost is absorbed into the remaining good output.

Under the perpetual inventory system, the cost of goods sold is recorded:

Answer: Each time a sale is made

The perpetual inventory system updates inventory and COGS continuously with each transaction, unlike the periodic system which calculates COGS only at period end.

Which financial instrument gives the holder the right, but not the obligation, to buy an asset at a specified price on or before a specified date?

Answer: Call option

A call option gives the holder the right, but not the obligation, to purchase an underlying asset at the strike price before or at expiration.

The PESTEL framework is used to analyze which type of business environment?

Answer: Macro-environmental external factors

PESTEL analyzes macro-environmental factors: Political, Economic, Social, Technological, Environmental, and Legal influences on an organization.

Which type of risk cannot be eliminated through diversification in a portfolio?

Answer: Systematic (market) risk

Systematic (market) risk affects all investments and cannot be eliminated through diversification, unlike unsystematic risk which is company-specific.

What is 'residual income' as a performance measure for investment centers?

Answer: Operating profit less a charge for the cost of capital employed

Residual income is operating profit minus a notional charge for the capital employed, rewarding managers who earn above the required rate of return.

What type of risk is associated with changes in foreign exchange rates affecting the value of transactions?

Answer: Currency (transaction) risk

Currency transaction risk arises when exchange rate movements affect the value of foreign currency denominated transactions before they are settled.

What does a 'non-disclosure agreement' (NDA) protect in a business context?

Answer: Confidential business information shared between parties from unauthorized disclosure

An NDA is a legal agreement preventing parties from disclosing confidential information shared during business dealings, partnerships, or employment.

Which of the following is a characteristic of a cost center?

Answer: It is accountable only for costs incurred

A cost center manager is responsible only for controlling costs; revenue and investment decisions are outside their scope.

Before lending to an entity, which TWO of the following pieces of information would a potential lender want to consider?

Answer: The ability of the entity to meet interest payments

Explanation: A potential lender would want to assess the entity's ability to meet its financial obligations, such as interest payments, to ensure the loan will be repaid. Additionally, understanding the entity's long-term business plans provides insight into its future financial stability and ability to generate revenue. The other options, past tax payments made by the entity, social policies of the entity, and dividend policy of the entity, are less relevant to a lender's decision-making process regarding lending to the entity.

Which legal structure provides owners with limited liability while avoiding the double taxation typical of C-corporations in the US?

Answer: S-Corporation (or LLC)

S-Corporations and LLCs (with pass-through election) provide limited liability to owners while allowing income to pass through to personal tax returns, avoiding double taxation.

According to CIMA, which of the following best describes 'enterprise risk management' (ERM)?

Answer: A comprehensive framework for identifying, assessing, and managing all risks across an organization

ERM is a comprehensive, organization-wide framework for identifying, assessing, and managing all categories of risk to support strategic objectives.

What is 'financial leverage' in the context of corporate finance?

Answer: The use of debt financing to amplify returns on equity

Financial leverage refers to the use of debt financing; it amplifies potential returns to equity holders but also increases financial risk.

In US business taxation, what is a 'tax credit' as distinct from a 'tax deduction'?

Answer: A tax credit directly reduces the tax owed; a deduction reduces taxable income

A tax credit directly reduces the tax liability dollar-for-dollar, making it more valuable than a deduction, which only reduces taxable income.

Company Y is a global business selling a selection of technological items including phones, laptops, and other computer-related items. In addition, Y sells accessory items, music downloads, apps: digital books, and video downloads including films and television series through a cooperative partnership with other companies, designed to create value for the customer. Which of the following terms best describes what Y has created?

Answer: A digital ecosystem

Explanation: Company Y has created an interconnected network of digital products and services, involving various partners, to enhance value for customers. This arrangement resembles a digital ecosystem, where different elements interact to provide comprehensive solutions and services to customers.

In the context of corporate governance, what does the term 'agency problem' refer to?

Answer: Conflict of interest between principals (shareholders) and agents (managers)

The agency problem refers to the conflict of interest that arises when managers (agents) may not act in the best interests of shareholders (principals).

What is 'throughput accounting' primarily focused on?

Answer: Maximizing throughput (sales minus direct materials) while managing operating expenses and inventory

Throughput accounting focuses on maximizing throughput contribution (sales less direct material costs) while keeping operating expenses and inventory as low as possible.

In a job costing system, overhead is typically applied using:

Answer: A predetermined overhead absorption rate

A predetermined overhead absorption rate (OAR) is calculated before the period begins and applied to jobs based on a chosen activity base.