CIMA Financial Reporting and Analysis 2 — Questions and Answers
Question 1: Which of the following is a non-cash item that must be added back to net income in the operating section of the indirect cash flow statement?
- Dividend payments
- Depreciation expense (Correct answer)
- Capital expenditures
- Repayment of long-term debt
Correct answer: Depreciation expense
Depreciation is a non-cash charge that reduces net income but does not involve a cash outflow, so it is added back under the indirect method.
Question 2: The acid-test (quick) ratio excludes which current asset from the numerator?
- Trade receivables
- Cash and cash equivalents
- Inventory (Correct answer)
- Short-term investments
Correct answer: Inventory
The acid-test ratio excludes inventory because it is the least liquid current asset and may not be quickly converted to cash.
Question 3: Under IAS 36, an impairment loss is recognized when an asset's carrying amount exceeds its:
- Historical cost
- Replacement cost
- Recoverable amount (Correct answer)
- Revalued amount
Correct answer: Recoverable amount
IAS 36 requires an impairment loss when the carrying amount exceeds the recoverable amount, which is the higher of fair value less costs of disposal and value in use.
Question 4: Earnings per share (EPS) is calculated by dividing:
- Net income by weighted average shares outstanding (Correct answer)
- Operating income by total shares issued
- Gross profit by ending shares outstanding
- EBITDA by average shares outstanding
Correct answer: Net income by weighted average shares outstanding
Basic EPS divides net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period.
Question 5: A company's gearing ratio measures:
- How efficiently assets generate sales revenue
- The proportion of debt financing relative to equity or total capital (Correct answer)
- The company's ability to pay short-term obligations
- Profitability relative to total assets
Correct answer: The proportion of debt financing relative to equity or total capital
Gearing (leverage) ratios measure the extent to which a company is financed by debt relative to equity or total capital.
Question 6: Under IFRS 15, revenue is recognized when:
- Cash is received from the customer
- An invoice is issued to the customer
- A performance obligation is satisfied (Correct answer)
- A signed contract is in place
Correct answer: A performance obligation is satisfied
IFRS 15 requires revenue to be recognized when (or as) a performance obligation is satisfied by transferring promised goods or services to the customer.
Question 7: The gross profit margin ratio is calculated as:
- Net profit divided by revenue
- Revenue minus cost of goods sold, divided by revenue (Correct answer)
- Operating profit divided by total assets
- Gross profit divided by total equity
Correct answer: Revenue minus cost of goods sold, divided by revenue
Gross profit margin equals (Revenue – Cost of Goods Sold) / Revenue, showing the percentage of revenue retained after direct production costs.
CIMA Financial Reporting and Analysis 2
Which of the following is a non-cash item that must be added back to net income in the operating section of the indirect cash flow statement?