CIMA Fundamentals of Financial Accounting 4 — Questions and Answers
Question 1: Which financial statement shows the financial position of a business at a specific point in time?
- Income statement
- Statement of cash flows
- Statement of changes in equity
- Statement of financial position (Correct answer)
Correct answer: Statement of financial position
The statement of financial position (balance sheet) is a snapshot at a given date showing assets, liabilities, and equity.
Question 2: A company issued 100,000 shares at $2 par value for $3.50 each. The share premium account will be credited with:
- $200,000
- $150,000 (Correct answer)
- $350,000
- $100,000
Correct answer: $150,000
Share premium = (Issue price − Par value) × Shares = ($3.50 − $2.00) × 100,000 = $150,000.
Question 3: Which of the following costs would NOT be included in the valuation of finished goods inventory?
- Direct materials
- Direct labor
- Selling and distribution expenses (Correct answer)
- Factory overhead absorbed
Correct answer: Selling and distribution expenses
IAS 2 requires inventory to include costs of conversion (direct labor, factory overhead) and direct materials, but selling costs are period expenses excluded from inventory.
Question 4: The accounting equation is best expressed as:
- Assets = Liabilities − Equity
- Assets + Equity = Liabilities
- Assets = Liabilities + Equity (Correct answer)
- Liabilities = Assets + Equity
Correct answer: Assets = Liabilities + Equity
The fundamental accounting equation is Assets = Liabilities + Equity, reflecting that all assets are funded by either debt (liabilities) or owners' contributions (equity).
Question 5: An entity revalues its property upward by $50,000. The correct accounting treatment is to:
- Credit the income statement by $50,000
- Debit retained earnings by $50,000
- Credit the revaluation surplus in other comprehensive income by $50,000 (Correct answer)
- Debit the revaluation surplus and credit the asset
Correct answer: Credit the revaluation surplus in other comprehensive income by $50,000
Under IAS 16, an upward revaluation is credited to the revaluation surplus (equity) and recognized in other comprehensive income, not in profit or loss.
Question 6: A company has a current ratio of 2.4 and current liabilities of $50,000. If inventory is $40,000, what is the quick ratio?
- 2.4
- 1.6 (Correct answer)
- 0.8
- 2.0
Correct answer: 1.6
Current assets = 2.4 × $50,000 = $120,000; Quick assets = $120,000 − $40,000 = $80,000; Quick ratio = $80,000 ÷ $50,000 = 1.6.
Question 7: An accrued expense at year-end requires which journal entry?
- Debit Prepaid Expense, Credit Cash
- Debit Expense, Credit Accrued Liability (Correct answer)
- Debit Cash, Credit Expense
- Debit Accrued Liability, Credit Expense
Correct answer: Debit Expense, Credit Accrued Liability
An accrued expense is recognized by debiting the expense account and crediting the accrued liability (a current liability) on the balance sheet.
CIMA Fundamentals of Financial Accounting 4
Which financial statement shows the financial position of a business at a specific point in time?