Chartered Institute of Management Accountants (CGMA) · Fundamentals of Financial Accounting
CIMA BA3 Accounting principles, concepts and regulations: practice questions with answers
6 free exam-style questions on Accounting principles, concepts and regulations for CIMA BA3 Fundamentals of Financial Accounting. Try each one, then open the answer to read the explanation. Fincora has 26 original questions on this syllabus area.
Question 1
According to the IASB's Conceptual Framework for Financial Reporting, which of the following are the two fundamental qualitative characteristics of useful financial information?
- A Comparability and understandability
- B Relevance and reliability
- C Relevance and faithful representation
- D Timeliness and verifiability
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Answer: C. The Conceptual Framework (2018) has two fundamental qualitative characteristics: relevance (capable of making a difference to users' decisions, including materiality) and faithful representation (complete, neutral and free from error). Four enhancing characteristics improve the usefulness of information that is already relevant and faithfully represented: comparability, verifiability, timeliness and understandability.
Question 2
Fenwick Co prepares its financial statements to 31 December 20X5. Applying the Conceptual Framework definition of a liability, which of the following is a liability of Fenwick Co at 31 December 20X5?
- A An order placed in December 20X5 for goods that the supplier will deliver and invoice in February 20X6
- B Staff training costs for 20X6 that the directors approved in a board meeting in November 20X5
- C Capital of $20,000 introduced into the business by its owners during 20X5
- D Wages earned by employees for work done in December 20X5 that will be paid on 7 January 20X6
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Answer: D. The Conceptual Framework defines a liability as a present obligation of the entity to transfer an economic resource as a result of past events. December wages meet the definition: the past event (employees working in December) has created an obligation to pay cash in January, so an accrual is recognised. A future purchase order not yet performed, and plans to spend money in the future, create no present obligation. Owners' capital is equity (the residual interest in the assets after deducting liabilities).
Question 3
Which body within the IFRS Foundation structure is responsible for developing and issuing IFRS Accounting Standards?
- A The International Accounting Standards Board (IASB)
- B The IFRS Interpretations Committee
- C The IFRS Advisory Council
- D The Trustees of the IFRS Foundation
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Answer: A. The IFRS Foundation is the parent organisation. Its Trustees are responsible for governance, funding and appointing members of the boards. The IASB develops and issues IFRS Accounting Standards after public consultation (discussion papers and exposure drafts). The IFRS Interpretations Committee interprets the application of standards, with interpretations ratified by the IASB, and the IFRS Advisory Council provides advice.
Question 4
Which of the following statements about financial accounting and management accounting is correct?
- A Management accounts must be prepared using IFRS Accounting Standards so that they can be compared with those of other companies
- B A company's published financial statements are prepared mainly to help its managers plan and control day-to-day operations
- C A company that produces detailed monthly management accounts does not need to prepare annual financial statements
- D Management accounting information can include non-financial measures, such as units produced, labour hours worked and numbers of customer complaints
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Answer: D. Financial accounting produces annual financial statements, mainly for external users. For companies, preparation is required by law and the content is governed by company law and accounting standards.
Management accounting produces information for internal managers to plan, control and make decisions. It is not regulated, so it can be prepared in any format, as often as needed, and can include non-financial information (units, hours, quality and customer measures) and forecasts.
Producing management accounts does not replace the legal requirement to prepare financial statements.
Question 5
Applying the IASB's Conceptual Framework for Financial Reporting, which of the following is an asset of Telford Glassware Ltd?
- A The skills of Telford Glassware's highly trained glass-blowers
- B A kiln that Telford Glassware has agreed to buy next month
- C Savings held in the managing director's personal bank account
- D Inventory held in Telford Glassware's warehouse that it bought on credit and has not yet paid for
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Answer: D. The Conceptual Framework defines an asset as a present economic resource controlled by the entity as a result of past events, where an economic resource is a right that has the potential to produce economic benefits.
- Inventory bought on credit: a past event (the purchase), it is controlled, and it can be sold. Asset. Owing the supplier does not stop it being an asset; it creates a separate liability.
- Employees' skills: not controlled by the entity.
- A kiln to be bought next month: no past event yet.
- The director's personal savings: controlled by the director, not the company.
Question 6
Which of the following is a feature of financial accounting rather than management accounting?
- A It produces reports mainly for external users, in formats governed by law and accounting standards
- B It produces reports in whatever format best suits the managers who will use them
- C It concentrates mainly on budgets, forecasts and other future-oriented information for planning
- D It produces detailed reports on the costs of individual products and departments for internal decisions
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Answer: A. Financial accounting records transactions and produces financial statements (statement of financial position, statement of profit or loss and so on). These are used mainly by external users such as shareholders, lenders, suppliers and tax authorities. For companies their form and content are governed by company law and accounting standards, and they mainly report on the past period.
Management accounting produces information for internal managers to plan, control and make decisions. This includes budgets, forecasts, product costs and departmental reports. It has no prescribed format and is often forward-looking.
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