CIMA Fundamentals of Financial Accounting 5 — Questions and Answers
Question 1: Which of the following best describes the prudence concept in financial accounting?
- Revenue and profits should be recognized as soon as reasonably certain, while losses should be anticipated only when confirmed
- Assets and revenues should not be overstated, and liabilities and expenses should not be understated (Correct answer)
- Financial statements should use the same methods consistently year to year
- Transactions should be recorded based on their economic substance, not legal form
Correct answer: Assets and revenues should not be overstated, and liabilities and expenses should not be understated
Prudence means exercising caution so that assets and income are not overstated and liabilities and expenses are not understated, avoiding overoptimism in financial reporting.
Question 2: A machine costing $30,000 with accumulated depreciation of $18,000 is sold for $14,000. The profit or loss on disposal is:
- Profit of $14,000
- Loss of $4,000
- Profit of $2,000 (Correct answer)
- Loss of $2,000
Correct answer: Profit of $2,000
Net book value = $30,000 − $18,000 = $12,000; Profit on disposal = $14,000 − $12,000 = $2,000.
Question 3: Under IAS 7, which of the following is classified as a financing activity in the statement of cash flows?
- Purchase of plant and equipment
- Receipt of interest on investments
- Payment of dividends to shareholders (Correct answer)
- Collection of trade receivables
Correct answer: Payment of dividends to shareholders
IAS 7 classifies dividend payments as financing activities (under the allowed alternative) because they are transactions with the entity's financiers.
Question 4: If opening inventory is $20,000, purchases are $80,000, and closing inventory is $15,000, what is the cost of goods sold?
- $75,000
- $95,000
- $85,000 (Correct answer)
- $65,000
Correct answer: $85,000
COGS = Opening inventory + Purchases − Closing inventory = $20,000 + $80,000 − $15,000 = $85,000.
Question 5: Which of the following correctly describes the matching concept?
- Assets must equal liabilities plus equity at all times
- Expenses should be recognized in the same period as the revenues they helped generate (Correct answer)
- Revenue should be recognized only when cash is received
- Financial information must be comparable across different entities
Correct answer: Expenses should be recognized in the same period as the revenues they helped generate
The matching concept (part of the accruals basis) requires that expenses be recognized in the accounting period in which the related revenue is earned.
Question 6: A company's gross profit margin is 40% and revenue is $250,000. What is the cost of goods sold?
- $100,000
- $150,000 (Correct answer)
- $175,000
- $162,500
Correct answer: $150,000
Gross profit = 40% × $250,000 = $100,000; COGS = Revenue − Gross profit = $250,000 − $100,000 = $150,000.
Question 7: Which of the following statements about the statement of changes in equity is correct?
- It reports only retained earnings movements during the period
- It summarizes all transactions with owners and total comprehensive income for the period (Correct answer)
- It replaces the income statement for reporting profit
- It is only required for publicly listed companies
Correct answer: It summarizes all transactions with owners and total comprehensive income for the period
The statement of changes in equity reconciles opening and closing equity by showing profit or loss, other comprehensive income, dividends, and share issuances during the period.
CIMA Fundamentals of Financial Accounting 5
Which of the following best describes the prudence concept in financial accounting?