CIMA Financial Reporting and Analysis 1 — Questions and Answers
Question 1: Which financial statement reports a company's assets, liabilities, and equity at a specific point in time?
- Income Statement
- Statement of Cash Flows
- Balance Sheet (Correct answer)
- Statement of Changes in Equity
Correct answer: Balance Sheet
The Balance Sheet (Statement of Financial Position) presents assets, liabilities, and equity as of a specific date.
Question 2: Under IFRS, intangible assets acquired through a business combination are recognized at:
- Historical cost minus accumulated amortization
- Fair value at the acquisition date (Correct answer)
- The carrying amount on the acquiree's books
- Replacement cost at the reporting date
Correct answer: Fair value at the acquisition date
IFRS 3 requires intangible assets acquired in a business combination to be recognized at fair value at the acquisition date.
Question 3: The current ratio is calculated as:
- Net income divided by total assets
- Current assets divided by current liabilities (Correct answer)
- Total liabilities divided by shareholders' equity
- Operating cash flow divided by current liabilities
Correct answer: Current assets divided by current liabilities
The current ratio measures short-term liquidity by dividing current assets by current liabilities.
Question 4: Deferred tax liabilities arise when:
- Tax losses are carried forward to future periods
- Accounting profit exceeds taxable profit in the current period (Correct answer)
- Taxable profit exceeds accounting profit in the current period
- Permanent differences exist between book and tax income
Correct answer: Accounting profit exceeds taxable profit in the current period
Deferred tax liabilities arise when accounting profit exceeds taxable profit, creating a temporary difference that will reverse in future periods.
Question 5: Which inventory valuation method is prohibited under IFRS?
- First-In, First-Out (FIFO)
- Weighted Average Cost
- Last-In, First-Out (LIFO) (Correct answer)
- Specific Identification
Correct answer: Last-In, First-Out (LIFO)
IAS 2 prohibits the use of LIFO because it does not represent a reliable estimate of the actual flow of inventory items.
Question 6: Return on Capital Employed (ROCE) is best defined as:
- Net profit divided by total equity
- Operating profit divided by total assets minus current liabilities (Correct answer)
- Gross profit divided by revenue
- Net income divided by total liabilities
Correct answer: Operating profit divided by total assets minus current liabilities
ROCE measures operating efficiency by dividing operating (EBIT) profit by capital employed, which equals total assets minus current liabilities.
Question 7: Under the effective interest rate method, bond discount amortization over time will:
- Remain constant each period
- Decrease each period
- Increase each period (Correct answer)
- Vary randomly based on market rates
Correct answer: Increase each period
As the carrying value of the bond increases over time, the interest expense (and thus discount amortization) grows each period under the effective interest method.
CIMA Financial Reporting and Analysis 1
Which financial statement reports a company's assets, liabilities, and equity at a specific point in time?