CIMA E1 Role of the finance function: practice questions with answers

Question 1

Kelvara Housing Association is a not-for-profit organisation that builds and lets affordable homes. It is funded by rents, government grants and long-term loans, and any surplus must be kept within the organisation. Which statement best describes how Kelvara creates value?

1. A By providing affordable, good-quality housing for its target tenants within its available funds, reinvesting any surplus in its homes and services
2. B By minimising its spending on repairs and services in every year so that its grant funding is never fully used up
3. C By increasing rents to the highest level the local market will bear so that its return on capital matches listed property companies
4. D By maximising the annual surplus so that it can be paid out as a dividend to the members who control the association

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Answer: A. Value for a not-for-profit is measured mainly by how well it achieves its social or public purpose with the resources entrusted to it (often described as value for money: economy, efficiency and effectiveness). Financial surpluses matter only as a means of sustaining the organisation and are reinvested rather than distributed to owners. Kelvara therefore creates value by delivering affordable, decent homes within its funding.

Question 2

Anika is a management accountant at Brellis plc. The finance director tells her that her fixed-term contract will not be renewed unless she removes a warranty provision that she believes is required, so that the division's profit meets its target. Under the CIMA Code of Ethics, which type of threat does Anika face?

1. A Advocacy threat
2. B Familiarity threat
3. C Self-interest threat
4. D Intimidation threat

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Answer: D. The CIMA Code of Ethics identifies five categories of threat to compliance with the fundamental principles: self-interest, self-review, advocacy, familiarity and intimidation. Being told that her contract will not be renewed unless she removes a provision is pressure designed to stop Anika acting objectively, which is an intimidation threat to her integrity and objectivity.

Question 3

Over the past year, to protect the business against losses, the finance team of Orlin Pharmacies has introduced credit checks on new trade customers, tightened controls over who can amend the stock records for controlled drugs, and taken out forward contracts to fix the cost of its euro-denominated purchases. Which role of the finance function do these activities mainly represent?

1. A Enabling value creation
2. B Shaping how value is created
3. C Preserving value
4. D Narrating the value creation story

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Answer: C. The finance function enables value creation (planning, budgeting, funding) and preserves value (the two are grouped together in the syllabus but are different activities), shapes how value is created (business model and strategy) and narrates the value creation story (reporting to stakeholders).

Preserving value is about protecting what the organisation already has: managing risks, designing internal controls and safeguarding assets. Credit checks reduce bad debts, controls over stock records reduce the risk of error and theft, and forward contracts remove the risk that a weaker home currency increases the cost of purchases. All three are value preservation.

Question 4

Ottilie has completed a detailed analysis of whether Fellgate Leisure should close two loss-making gyms. The board has allowed 10 minutes for the item at its next meeting. Which approach is most likely to influence the board's decision?

1. A A one-page paper that opens with her recommendation, gives the main financial and non-financial reasons and risks, and puts the detailed workings in an appendix
2. B A 40-page report that sets out every calculation in the order she carried it out, with her recommendation on the final page
3. C A verbal summary that gives the recommendation but no figures, so that the board is not distracted by the numbers
4. D The full spreadsheet model emailed to directors the evening before, with no covering summary, so that they can reach their own conclusions

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Answer: A. Communicating insight to influence users means presenting it in a way that the audience can understand and act on. The CGMA principle is that communication provides insight that is influential.

For a board with limited time this means: start with the recommendation and the key message, give the main reasons, risks and figures concisely, tailor the level of detail to the audience, and keep supporting workings available in an appendix.

Question 5

A finance analyst at Brindle Health Trust found that about $2.1 million of medicines expire unused in ward stock each year, and that most of the loss could be avoided by changing reorder levels. The finding appeared on page 52 of a 60-page monthly finance pack, with no summary or recommendation, and no action was taken. Which statement best explains why the analysis created no value?

1. A The data was collated poorly, because expiry data should have been collected from the wards before analysis
2. B The analysis was not detailed enough, and a fuller analysis would have made the managers act on it
3. C No value was lost, because finance's responsibility ends once the analysis has been completed and filed
4. D The insight was not communicated to influence the managers, so it never reached implementation

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Answer: D. Finance creates value through a connected set of activities: collating data, analysing it, communicating insight to influence users and supporting implementation. Here the data and analysis were good, but the insight was buried with no summary or recommendation, so no decision was made and nothing was implemented. A short note to the pharmacy and ward managers setting out the loss, its cause and the recommended change to reorder levels would have connected the analysis to action.

Question 6

Last year Mateo, a management accountant at Hollins Engineering, designed the company's new inventory costing system. He has now been seconded to the internal audit team and asked to report on whether the controls in that system are working effectively. Under the CIMA Code of Ethics, which threat does this assignment create?

1. A Advocacy threat
2. B Self-review threat
3. C Intimidation threat
4. D Self-interest threat

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Answer: B. The five categories of threat in the CIMA Code are self-interest, self-review, advocacy, familiarity and intimidation. A self-review threat arises when an accountant must evaluate the results of a previous judgement or service that they performed themselves. A safeguard would be for someone independent of the system's design to perform the review.