# FREE CIMA Fundamentals of Financial Accounting Questions and Answers

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#### The Finance Director of EFG company has made the following statements regarding the recording of expenditures relating to the entity's property, plant, and equipment (PPE) in the nominal ledger. Which THREE of the following statements are true?

Correct! Wrong!

Explanation:
1. Depreciation is an expense recorded on the income statement, which reduces the company's profit for the year.
2. The loss on the disposal of PPE is also an expense recorded on the income statement, reducing the profit for the year.
3. Depreciation reduces the carrying value (book value) of PPE on the balance sheet, reflecting the decrease in the asset's value over time.

#### GG has the statement below of profit or loss extract for the year ended 31 December 20X3. What is the interest cover for GG for the year ended 31 December 20X3?

Correct! Wrong!

Explanation:
Interest cover is calculated by dividing earnings before interest and taxes (EBIT) by the interest expense.

#### A company produces a single product for which the following cost data are available. Analysis by the management accountant has shown that 100% of direct material costs and 50% of direct labor costs are variable costs. 50% of production overhead and 100% of selling and distribution overhead are variable costs. What is the marginal cost per unit?

Correct! Wrong!

Explanation:
The marginal cost per unit includes only the variable costs associated with producing one additional unit.

#### A company's policy is to hold closing inventory each month equal to 10% of the next month's budgeted sales volume. The budgeted sales volumes of product Q for months 1 and 2 are 1,660 units and 2,300 units respectively. The production budget for product Q for month 1 is:

Correct! Wrong!

Explanation:
To calculate the production budget for month 1, we need to produce enough to cover sales for month 2 plus the desired closing inventory for month 1.

For month 2: 10% of 2,300 units = 230 units (desired closing inventory)
Total units needed for month 1 = 2,300 units (for month 2) + 230 units (closing inventory for month 1) = 2,530 units

So, the production budget for month 1 is 2,530 units - 936 units (beginning inventory) = 1,594 units.

#### A hairdressing salon can either invest in: 1. New. more comfortable chairs for \$5,000 2. New shop windows for \$4,000 Over the next five years. Investment 1 will generate an additional amount of profit whose present value is \$6,000. while Investment 2 additional amount of profit whose present value is \$5,500 What is the net present value of the best project? Give your answer to the nearest whole dollar.

Correct! Wrong!

Explanation:
To find the net present value (NPV) of each project, you subtract the initial investment from the present value of the additional profit generated over the next five years.

For Investment 1:
NPV = Present value of additional profit - Initial investment
= \$6,000 - \$5,000
= \$1,000

For Investment 2:
NPV = Present value of additional profit - Initial investment
= \$5,500 - \$4,000
= \$1,500

Since Investment 2 has a higher NPV (\$1,500), it is the best project. So, the net present value of the best project is \$1500.

#### IAS 2 Inventories does not permit the use of the last in. first out (LIFO) method of valuing inventory In a time of rising prices, which of the following is a reason for this?

Correct! Wrong!

Explanation:
In the context of rising prices, using the LIFO method means that the older, cheaper inventory is assumed to be sold first, leaving the newer, more expensive inventory in the closing inventory. This results in the closing inventory being understated because it reflects the cost of older inventory rather than the current higher prices.

#### Which of the following is a feature of not-for-profit organizations (NFPs)?

Correct! Wrong!

Explanation:
Not-for-profit organizations (NFPs) often have diverse objectives, ranging from providing social services to promoting cultural or environmental initiatives. Unlike for-profit entities, NFPs typically don't have shareholders expecting financial returns, and they often rely on diverse funding sources, including grants and donations, which may or may not be restricted. While some NFPs may face resource constraints, it's not accurate to generalize that they use resources inefficiently.

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

Correct! Wrong!

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.

#### In the year ended 31 December 20X1, XYZ received an email confirming that a major customer had gone into liquidation and would be unable to pay its suppliers. Which of the following is the impact of adjusting for this event?

Correct! Wrong!

Explanation:
When a major customer goes into liquidation, likely, the amount XYZ expected to receive from them will not be paid. This means that the accounts receivable balance decreases because it's unlikely to be collected. Additionally, the allowance for doubtful debts or bad debts increases to reflect the potential loss from the liquidation.

#### UVW is preparing its manufacturing account for the year ended 30 June 20X7 The following information is available: What is UVWs prime cost for year ended 30 June 20X7?

Correct! Wrong!

Explanation:
Prime cost is the sum of direct materials cost and direct labor cost. In this case, the prime cost can be calculated as:

Prime Cost = Direct Materials + Direct Labor
Prime Cost = \$200,000 + \$152,000
Prime Cost = \$352,000

#### The forecast costs per unit for a new product are as shown in the table below. The company uses marginal cost-plus pricing and all products are required to achieve a 40% margin. What would be the selling price per unit?

Correct! Wrong!

Explanation:
To calculate the selling price per unit using marginal cost-plus pricing, you add the desired margin percentage to the marginal cost per unit.

Given that the desired margin is 40%, and the marginal cost per unit is \$33, the selling price per unit would be:

Selling price per unit = Marginal cost per unit + (Desired margin * Marginal cost per unit)
Selling price per unit = \$33 + (0.40 * \$33)
Selling price per unit = \$33 + \$13.20
Selling price per unit = \$46.20