CIMA Fundamentals of Financial Accounting 3 — Questions and Answers
Question 1: A sole trader's drawings of $15,000 during the year would appear in the financial statements as:
- An operating expense in the income statement
- A deduction from capital in the balance sheet (Correct answer)
- A current liability in the balance sheet
- Revenue in the income statement
Correct answer: A deduction from capital in the balance sheet
Drawings are not an expense; they represent the owner withdrawing capital, so they reduce the capital balance in the balance sheet.
Question 2: The double-entry for recording a bad debt written off is:
- Debit Bad Debt Expense, Credit Cash
- Debit Accounts Receivable, Credit Bad Debt Expense
- Debit Bad Debt Expense, Credit Accounts Receivable (Correct answer)
- Debit Cash, Credit Bad Debt Expense
Correct answer: Debit Bad Debt Expense, Credit Accounts Receivable
Writing off a bad debt removes the receivable (credit) and recognizes the loss as an expense (debit Bad Debt Expense).
Question 3: Which inventory valuation method assigns the cost of the most recently purchased items to cost of goods sold first?
- FIFO
- Weighted average cost
- LIFO (Correct answer)
- Specific identification
Correct answer: LIFO
LIFO (Last In, First Out) assumes that the most recently purchased inventory is sold first, resulting in higher COGS during inflationary periods.
Question 4: A prepayment of $3,600 rent paid on October 1 for 12 months would result in what balance sheet entry at December 31?
- Accrued expense of $900
- Prepaid expense of $2,700 (Correct answer)
- Prepaid expense of $900
- Accrued expense of $2,700
Correct answer: Prepaid expense of $2,700
Three months of rent ($900) has been expensed by December 31, leaving 9 months × $300 = $2,700 as a prepaid (current asset) on the balance sheet.
Question 5: The trial balance of a company shows total debits of $500,000 but total credits of $492,000. This most likely indicates:
- A $4,000 error on both sides
- A transposition error or omission of a $8,000 credit entry (Correct answer)
- The company is profitable by $8,000
- Drawings were not recorded
Correct answer: A transposition error or omission of a $8,000 credit entry
An $8,000 difference in the trial balance suggests a missing credit entry or a transposition error (e.g., $80,000 entered as $72,000) causing an imbalance.
Question 6: Under the accruals basis, revenue from a service contract completed in December but invoiced in January should be recognized:
- In January when invoiced
- In December when the service was completed (Correct answer)
- When cash is received
- Equally split between December and January
Correct 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.
Question 7: Goodwill arising on the acquisition of a subsidiary is classified as:
- A current asset
- An intangible non-current asset (Correct answer)
- A tangible non-current asset
- A revenue expense
Correct answer: An intangible non-current asset
Goodwill is an intangible non-current asset representing the excess of the acquisition price over the fair value of net identifiable assets acquired.
CIMA Fundamentals of Financial Accounting 3
A sole trader's drawings of $15,000 during the year would appear in the financial statements as: