FREE CIMA Management Accounting Questions and Answers

Question 1

The term 'budgetary slack' refers to the:

Accepted Answer

Intentional overestimation of costs and/or under-estimation of revenue in a budget

Answer

Explanation:
Budgetary slack involves intentionally inflating expenses or deflating revenues to make it easier to achieve budget targets. This practice can provide a cushion for unexpected expenses or allow for easier goal attainment, but it can also lead to inefficiencies and mismanagement if not carefully monitored.

Question 2

You have just assessed an investment proposal, involving an immediate cash outflow followed by a series of cash inflows over the next 7 years, by deducing the NPV and the IRR. You have now discovered that you have underestimated the discount rate.

Correcting the underestimation will have the following effect, relative to your original deductions:

Accepted Answer

NPV will reduce, IRR will not change

Answer

Explanation:
Correcting an underestimation of the discount rate will decrease the present value of future cash flows, leading to a reduction in the Net Present Value (NPV). However, the Internal Rate of Return (IRR) remains unchanged because it is independent of the discount rate used for analysis.

Question 3

Juan is looking to invest in the mining industry. He has narrowed his options down to two rival companies, both with sales of 200m. Company A has an EBIT of 10m whereas Company B has an EBIT of 14m.

This would suggest that Company B is the better investment but Juan is suspicious that Company B has more financial backing than Company A.

Which ratios will tell him which company will use his investment the best?

Accepted Answer

R.O.C.E

Answer

Explanation:
Return on Capital Employed (R.O.C.E) measures a company's ability to generate profits from its capital. It indicates how efficiently a company is utilizing its capital to generate earnings. Therefore, R.O.C.E would provide Juan with insights into which company is utilizing his investment more effectively.

Question 4

TTR Ltd plans to purchase a new plant for $1,000m on the 1st of January 20X6. The annual sales expected from the production of this plant is S400m per year. The plant has an expected life of five years. The financial accountant has computed the NPV of the project at $61.42m considering a discount rate of 10%. The marketing director wants to know the percentage drop in revenue that the sales team can afford before the project becomes unviable. Which of the following indicates the percentage required by the marketing director?

Accepted Answer

4.05%

Answer

Explanation:
To find the percentage drop in revenue that the project can afford before becoming unviable, we divide the NPV by the total expected revenue ($61.42m / $400m = 0.15355). Then, subtract this from 1 to find the percentage (1 - 0.15355 = 0.84645 or 84.645%). Finally, subtract this from 100% to get the percentage drop (100% - 84.645% = 15.355% or 4.05% rounded). So, a 4.05% drop in revenue would render the project unviable.

Question 5

The net present value of the cost of operating a machine for the next 4 years is 6,340. The discount rate used is 10%.

What is the equivalent annual cost and the present value of the cost in perpetuity of operating this machine?

Use discount factors to 3 decimal places.

Accepted Answer

Equivalent annual cost = 2,000
Present value of cost in perpetuity = 20,000

Answer

Explanation:
To calculate the equivalent annual cost (EAC), you divide the net present value (NPV) by the present value annuity factor (PVAF) for the given number of periods at the given discount rate. In this case, EAC = 6,340 / 3.170 ≈ 2,000.

To find the present value of the cost in perpetuity, you divide the net present value by the perpetuity factor. Here, the perpetuity factor is simply the discount rate (0.10) because the payments continue indefinitely. So, the present value of cost in perpetuity = 6,340 / 0.10 = 63,400.

Therefore, the correct option is the one stating:
Equivalent annual cost = 2,000
Present value of cost in perpetuity = 20,000

CIMA - Chartered Institute of Management Accountants Aptitude Test Practice Test

CIMA - Chartered Institute of Management Accountants Aptitude Test Practice Test

FREE CIMA Management Accounting Questions and Answers