Practice questions · Finance & Accounting
CIMA (CGMA Professional Qualification): Practice Questions
Original concept-check questions for CIMA's CGMA Professional Qualification, weighted toward the Operational level (E1, P1, F1) with a smaller set at Management level (E2, P2, F2). Each answer is explained, including why the wrong options are wrong. Filter by domain or difficulty. These check understanding of publicly documented concepts - they are not exam simulations and reproduce nothing from live exams.
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Within the CGMA framework, what is the core purpose of the finance function in an organisation?
Correct answer: C. The syllabus frames finance as generating insight from information and using that insight to influence decisions and create value. It is not limited to tax filings, it informs rather than owns commercial decisions, and its job is stewardship of value, not freezing costs at a fixed level. -
Which type of task is the strongest candidate for robotic process automation (RPA) in a finance department?
Correct answer: A. RPA suits high-volume, repetitive work governed by clear rules, which is why invoice matching automates well. Negotiation, strategy setting and judging morale all rely on human judgement and context, which rule-based software cannot supply. -
A dashboard that explains why sales fell last quarter is performing which type of data analytics?
Correct answer: B. Diagnostic analytics digs into why something happened - here, the causes of the fall in sales. Descriptive analytics only reports what happened, predictive analytics estimates what is likely to happen next, and prescriptive analytics recommends what to do about it. -
What is the main advantage of running finance systems in the cloud rather than on local servers?
Correct answer: D. Cloud services let an organisation scale computing capacity flexibly and pay for what it uses instead of buying servers. Security controls remain essential, no provider can promise zero failures, and cloud data stays private behind access controls rather than becoming public. -
Finance business partnering is best described as:
Correct answer: B. Business partnering embeds finance expertise in the business so that analysis shapes operational and commercial decisions. It is not outsourcing, not a departmental merger, and it supports rather than replaces line managers. -
As routine transaction processing is automated, how does the day-to-day work of finance teams typically change?
Correct answer: A. Automation strips out routine processing, so the human work shifts toward analysis, interpretation and influence - the syllabus story of the changing finance function. Headcount does not automatically double, management information continues, and manual entry shrinks rather than grows. -
In discussions of big data, the four commonly cited characteristics are volume, velocity, variety and:
Correct answer: C. Veracity - the trustworthiness and quality of the data - completes the usual four Vs alongside volume, velocity and variety. Visibility, volatility and verbosity sound similar but are not part of the standard framing of big data characteristics. -
An enterprise resource planning (ERP) system primarily does which of the following?
Correct answer: D. An ERP integrates processes such as purchasing, inventory and accounting on one shared data platform. It does not remove reporting obligations, it covers far more than payroll, and its whole point is to avoid unconnected departmental silos. -
A finance team uses a model that recommends the cheapest shipping route for each order before it is placed. Which analytics type is this?
Correct answer: B. Recommending a course of action - the route to choose - is prescriptive analytics. Descriptive analytics summarises what happened, diagnostic explains why it happened, and predictive forecasts what will happen; none of those goes as far as advising the decision itself. -
Which cost is a direct cost of manufacturing a wooden table?
Correct answer: A. Direct costs can be traced in full to a specific cost unit, and the timber in a table is exactly that. Rent, supervision and shared depreciation support production as a whole, so they are indirect costs absorbed as overhead. -
How does total variable cost behave as production output increases?
Correct answer: D. Total variable cost moves in line with activity, so it rises as output rises while the cost per unit stays broadly constant. A cost that stays fixed in total is a fixed cost, and variable cost per unit does not fall simply because volume grows. -
In marginal costing, contribution is calculated as:
Correct answer: C. Contribution is sales revenue less variable costs: the amount each sale contributes toward covering fixed costs and then profit. Deducting all costs gives profit rather than contribution, and the other two combinations have no meaning in cost-volume-profit analysis. -
The key difference between absorption costing and marginal costing is the treatment of:
Correct answer: B. Absorption costing carries fixed production overheads into inventory values, while marginal costing writes them off as period costs. Direct materials are product costs under both systems, and selling and distribution costs - fixed or variable - are period costs under both. -
A company's breakeven point in units is found by dividing total fixed costs by:
Correct answer: A. Each unit's contribution goes first toward fixed costs, so fixed costs divided by contribution per unit gives the volume at which they are exactly covered. Dividing by selling price ignores variable costs, and total variable cost or reported profit per unit do not measure that recovery. -
The margin of safety measures:
Correct answer: C. Margin of safety is the gap between budgeted or actual sales and breakeven sales, showing the cushion before losses begin. It is not a cap on fixed costs, an emergency cash reserve, or a limit on pricing discounts. -
An adverse material price variance means that:
Correct answer: D. The material price variance compares the actual purchase price with the standard price, so adverse means materials cost more per unit than planned. Usage and waste belong to the usage variance, and an adverse result signals a price difference, not necessarily an error in the standard. -
Why is a budget flexed before variances are calculated?
Correct answer: A. Flexing restates the budget at the actual activity level, so cost and revenue differences reflect performance rather than volume. It is not about concealing overspends, ratcheting targets upward, or stripping fixed costs out of the report. -
A machine bought last year for a project that was cancelled has no other use. When deciding whether to run a new project using the machine, its original purchase cost is:
Correct answer: B. The purchase price is already spent and cannot be changed by the decision, which is the definition of a sunk cost, so relevant costing ignores it. Having paid it does not make it relevant, an opportunity cost is a benefit forgone elsewhere, and a one-off past payment is not a variable cost. -
When one production resource is scarce, profit is maximised by ranking products in order of:
Correct answer: C. With a single limiting factor, each unit of that resource should earn as much contribution as possible, so products are ranked by contribution per unit of the scarce resource. Ranking by contribution per product unit, revenue or margin percentage ignores how much of the bottleneck each product consumes. -
A project has a 60% chance of earning a high cash inflow and a 40% chance of a lower one. Multiplying each outcome by its probability and adding the results gives:
Correct answer: D. Weighting each outcome by its probability and summing gives the expected value, a long-run average used to compare uncertain options. It is not the single most likely result, not the worst case, and it guarantees nothing - the actual outcome will be one of the individual possibilities. -
Under the accruals basis of accounting, an expense is recognised when:
Correct answer: B. Accruals accounting matches expenses to the period in which they are incurred, regardless of payment timing. Invoice arrival and cash payment affect recording mechanics and cash flow rather than recognition, and waiting for sign-off would delay every expense to year end. -
Which statement shows an entity's assets, liabilities and equity at a single date?
Correct answer: A. The statement of financial position is the snapshot of assets, liabilities and equity at the reporting date. Profit or loss and cash flows report performance over a period rather than a position at a date, and the chairman's review is narrative commentary, not a financial statement. -
International Financial Reporting Standards (IFRS) are issued by:
Correct answer: D. The IASB develops and issues IFRS. Tax authorities set tax rules rather than financial reporting standards, company management applies standards instead of writing them, and audit firms audit against IFRS but have no power to issue them. -
The purpose of charging depreciation on a machine is to:
Correct answer: C. Depreciation allocates the cost of an asset over its useful life, matching cost against the revenue it helps earn. It is not a valuation at market price, it moves no cash into any replacement fund, and tax deductions follow separate tax rules such as capital allowances. -
Working capital is defined as:
Correct answer: B. Working capital is current assets less current liabilities - the resources tied up in day-to-day trading. Total assets less total liabilities gives equity, share capital plus retained earnings is also equity, and netting non-current assets against long-term debt measures neither. -
A retailer's inventory days are 40, receivables days 5 and payables days 35. Its cash operating cycle is:
Correct answer: D. The cash operating cycle is inventory days plus receivables days minus payables days: 40 + 5 - 35 = 10. Adding all three ignores that supplier credit shortens the cycle, using inventory alone ignores collection and payment timing, and the components only net to zero by coincidence. -
Which of the following is a distinguishing feature of an indirect tax such as VAT or sales tax?
Correct answer: A. Indirect taxes are levied on transactions and collected by the seller on the authority's behalf, with the burden generally passed to the final consumer. Taxes on profits and employment income are direct taxes, and passing the cost to consumers is exactly how indirect taxes work. -
A profitable company can still run out of cash because:
Correct answer: C. Accruals-based profit recognises income and expenses when earned or incurred, so a firm can report profit while customers have not yet paid or while cash sits in inventory. Profit rarely equals cash flow, depreciation is a non-cash charge, and auditors do not take company cash. -
In a classified statement of financial position, a bank loan repayable in ten years is presented as:
Correct answer: B. Obligations settled more than twelve months after the reporting date are non-current liabilities, and a ten-year loan clearly qualifies. It is not due within the operating cycle, borrowing is never equity, and a loan owed is a liability rather than any kind of asset. -
The main objective of managing trade receivables is to:
Correct answer: D. Receivables management balances two aims: turning credit sales into cash quickly and keeping credit terms attractive enough to win business. Abolishing credit sales sacrifices revenue, ever-longer credit worsens cash flow, and invoice queries cannot be eliminated by policy. -
In a decentralised organisation, decision-making authority is:
Correct answer: A. Decentralisation pushes decision rights down to divisional or unit managers, who are closer to their markets and customers. Full concentration at head office is centralisation, and neither consultants nor the finance function receive general decision authority under either model. -
Organisational culture is most accurately described as:
Correct answer: B. Culture is the shared, often unwritten, values and assumptions that guide how people actually behave. The organisation chart shows formal structure, employment contracts set legal terms, and office design may reflect culture but does not define it. -
Which characteristics distinguish a project from business-as-usual operations?
Correct answer: C. A project is a temporary undertaking with a defined objective and a unique deliverable, unlike ongoing repetitive operations. Permanence and annual repetition describe operations, projects certainly carry budgets and resources, and they are usually staffed by internal as well as external people. -
A company competes by being the lowest-cost producer in its industry while selling at around the market price. Which generic strategy is it following?
Correct answer: D. Earning higher margins by holding the lowest cost base while selling at market prices is cost leadership. Differentiation justifies higher prices through distinctiveness rather than lower costs, focus strategies target a narrow segment, and premium pricing is the opposite of competing on cost. -
The main purpose of a staff performance appraisal is to:
Correct answer: A. Appraisals review performance against agreed objectives and identify development and support needs. Treating them as dismissal files poisons the process, public ranking is not their purpose, and an annual review supplements rather than replaces ongoing feedback. -
The manager of an investment centre is accountable for:
Correct answer: B. An investment centre manager answers for profit and for the assets used to earn it, which is why ROI and residual income are used to judge such centres. Cost-only accountability defines a cost centre, revenue-only a revenue centre, and cash receipts alone measure none of these. -
A well-designed transfer pricing system should primarily encourage divisional managers to:
Correct answer: C. The test of a transfer price is goal congruence: decisions that look right for a division should also be right for the group. Encouraging local gains at the group's expense defeats the purpose, always buying externally ignores cheaper internal capacity, and inflating internal sales is distortion, not design. -
Under the net present value (NPV) rule, a project should be accepted when:
Correct answer: A. A positive NPV means discounted inflows exceed discounted outflows, so the project adds value at the required return. First-year accounting profit ignores later cash flows and discounting, a payback longer than the project life means the outlay is never recovered, and an IRR below the cost of capital signals rejection. -
Compared with return on investment (ROI), the main behavioural advantage of residual income (RI) is that it:
Correct answer: D. RI charges profit with a capital charge, so any project earning more than the required return raises RI and gets accepted, even when it would dilute a high ROI percentage. RI is an absolute figure rather than a percentage, it explicitly includes the financing charge, and it guarantees nothing about reported results. -
A key limitation of the simple payback method of investment appraisal is that it:
Correct answer: B. Simple payback stops at the point the outlay is recovered, ignoring later cash flows, and it does not discount, ignoring the time value of money. It needs only project cash flows rather than published statements, it deliberately does not consider the whole life, and its simplicity is why managers like it. -
A parent company consolidates a subsidiary into group financial statements when it:
Correct answer: C. Consolidation follows control: the power to direct the other entity's relevant activities, usually through a majority of voting rights. A small shareholding gives no control, one shared director does not by itself, and trading regularly creates a commercial relationship, not a group. -
In a business combination, goodwill arises when:
Correct answer: D. Goodwill is the excess of consideration over the fair value of identifiable net assets acquired, paying for things like reputation, workforce and synergies. The reverse situation produces a bargain-purchase gain rather than goodwill, past subsidiary losses do not create it, and revaluing the parent's own property is unrelated. -
The non-controlling interest (NCI) in consolidated financial statements represents:
Correct answer: A. NCI is the slice of a subsidiary's equity belonging to shareholders other than the parent, shown within group equity. Directors' personal holdings in the parent, intra-group loans and dividends paid to the parent's own shareholders are all different things entirely. -
A company's gearing ratio measures:
Correct answer: B. Gearing compares debt with equity, or debt with total capital, showing reliance on borrowed funds and the financial risk that follows. Inventory turnover measures operating efficiency, the payout ratio covers dividends, and interest cover is a related but separate measure of debt servicing. -
Compared with equity finance, a defining feature of debt finance is that:
Correct answer: C. Debt carries a contractual obligation: interest and repayments fall due whether or not the company is profitable, which is the source of financial risk. Lenders do not vote at the AGM, discretionary payments describe dividends on equity, and borrowing issues no new ordinary shares.
Practice questions FAQ
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