ICAEW ACA PROFESSIONAL LEVEL-BUSINESS PLANNING
EXAM | ALL QUESTIONS AND ANSWERS | A+ GRADED |
COMPREHENSIVE EXAM GUIDE 2026/2027
1. A UK-resident individual is considering transferring an investment portfolio to a
company wholly owned by the individual. The individual wants to retain effective control
while deferring any immediate tax liability. Which factor should be considered FIRST
when evaluating whether the proposed incorporation is appropriate?
A. The company's dividend policy
B. Whether the transfer qualifies for appropriate incorporation relief
C. The company's accounting reference date
D. Whether the individual has sufficient cash to fund dividends
Answer: B
Rationale: Incorporation planning requires consideration of the tax consequences of
transferring the business and whether the statutory conditions for relief are satisfied. Control
and commercial purpose must also be considered before recommending the transaction.
2. A company has accumulated substantial cash reserves that are not currently required
for working capital. The directors are considering paying a dividend to shareholders.
Which consideration is MOST relevant before recommending the distribution?
A. Whether the company has sufficient distributable profits
B. Whether the company's bank requires notification
C. Whether the dividend increases revenue
D. Whether the dividend changes the company's accounting policies
Answer: A
Rationale: A company may only make a lawful distribution out of distributable profits. The
availability of cash alone does not establish that a dividend can legally be paid.
3. A client asks an adviser to recommend a tax planning arrangement solely because it
produces the lowest possible tax liability, despite significant commercial uncertainty. What
should the adviser do?
A. Recommend the arrangement because minimising tax is always the client's objective
B. Recommend the arrangement but omit the commercial risks
C. Evaluate the commercial, legal, ethical and tax consequences before advising
D. Proceed if the arrangement has been used by another client
Answer: C
,Rationale: Professional advice must consider the client's wider objectives, commercial
consequences, legal requirements and ethical responsibilities rather than focusing exclusively
on tax minimisation.
4. A company plans to acquire a trading subsidiary. The subsidiary owns both trading
assets and an investment property. Why is the distinction important when assessing the
transaction?
A. Investment property can never be acquired by a company
B. The investment property may receive different tax treatment from the trading assets
C. Trading assets are automatically exempt from tax
D. The distinction only affects management accounts
Answer: B
Rationale: Different categories of assets can have materially different tax consequences. The
investment property therefore requires separate consideration when evaluating the
acquisition structure.
5. A company is profitable but is experiencing severe cash-flow pressure because customers
are paying substantially later than agreed. Which management action is MOST directly
aimed at addressing the immediate problem?
A. Increase the company's depreciation charge
B. Extend supplier payment periods without negotiation
C. Tighten credit control and accelerate collection of receivables
D. Increase the company's dividend payment
Answer: C
Rationale: Accelerating receivable collections directly improves operating cash flow. The issue
is a working-capital problem rather than an accounting-profit problem.
6. A business has forecast a significant increase in sales following the launch of a new
product. The finance director wants to rely entirely on the forecast when deciding whether
to increase production capacity. What is the BEST response?
A. Approve the investment because sales forecasts are objective
B. Assess forecast assumptions, sensitivity and downside scenarios
C. Ignore the forecast and use last year's sales only
D. Increase capacity immediately because higher sales always improve cash flow
Answer: B
,Rationale: Investment decisions should be based on the reliability of assumptions and the
potential impact of uncertainty. Sensitivity and scenario analysis can identify whether the
decision remains viable under adverse conditions.
7. A company has a highly profitable division and a loss-making division. Senior
management proposes closing the loss-making division immediately. Which information is
MOST important before making the decision?
A. Whether the loss-making division has positive contribution after avoidable costs
B. Whether the division has the largest office
C. Whether its employees have worked for the company for more than five years
D. Whether the division has the oldest equipment
Answer: A
Rationale: A division should not automatically be closed simply because it reports an
accounting loss. Its contribution after avoidable costs and the effect of closure on the rest of
the business must be considered.
8. A client is considering financing a new investment entirely through additional
borrowing. Which risk should receive particular attention?
A. The reduction in depreciation expense
B. The effect of additional interest and repayment obligations on cash flow
C. The elimination of shareholder risk
D. The automatic increase in return on assets
Answer: B
Rationale: Debt financing creates contractual interest and repayment obligations. The
business must therefore demonstrate sufficient future cash flows to service the additional
debt.
9. A company prepares a five-year strategic plan. During the second year, a major
competitor introduces a substantially cheaper product. What should management do
FIRST?
A. Continue with the original plan regardless of market conditions
B. Abandon all strategic objectives immediately
C. Reassess the assumptions underlying the strategy and evaluate alternatives
D. Increase dividends to reassure shareholders
Answer: C
, Rationale: Strategic plans should be reviewed when material external assumptions change.
Management should reassess the competitive environment and determine whether strategic
objectives or implementation need modification.
10. A business has a high gross profit margin but consistently reports weak operating cash
flows. Which explanation is MOST plausible?
A. The business may have excessive investment in working capital
B. Gross profit automatically equals cash generated
C. The company must have no receivables
D. High margins always indicate strong liquidity
Answer: A
Rationale: Profitability and liquidity are different measures. Significant increases in
receivables or inventory can absorb cash even when gross margins are strong.
11. A company is evaluating two mutually exclusive projects. Project A has the higher
accounting profit, while Project B has the higher net present value. Which project should
generally be preferred if the objective is shareholder value maximisation?
A. Project A
B. Project B
C. The project with the longer payback period
D. The project with the higher accounting depreciation
Answer: B
Rationale: Net present value directly considers relevant cash flows and the time value of
money, making it a stronger measure of value creation than accounting profit for investment
appraisal.
12. A project has a positive NPV at the company's current discount rate but becomes
negative with only a small increase in the discount rate. What does this indicate?
A. The project has no financial risk
B. The project is highly sensitive to the required return
C. The project must be accepted immediately
D. The project has a guaranteed return
Answer: B
Rationale: A small change in the discount rate materially affecting NPV indicates that project
viability is sensitive to the required return and therefore warrants additional risk assessment.
EXAM | ALL QUESTIONS AND ANSWERS | A+ GRADED |
COMPREHENSIVE EXAM GUIDE 2026/2027
1. A UK-resident individual is considering transferring an investment portfolio to a
company wholly owned by the individual. The individual wants to retain effective control
while deferring any immediate tax liability. Which factor should be considered FIRST
when evaluating whether the proposed incorporation is appropriate?
A. The company's dividend policy
B. Whether the transfer qualifies for appropriate incorporation relief
C. The company's accounting reference date
D. Whether the individual has sufficient cash to fund dividends
Answer: B
Rationale: Incorporation planning requires consideration of the tax consequences of
transferring the business and whether the statutory conditions for relief are satisfied. Control
and commercial purpose must also be considered before recommending the transaction.
2. A company has accumulated substantial cash reserves that are not currently required
for working capital. The directors are considering paying a dividend to shareholders.
Which consideration is MOST relevant before recommending the distribution?
A. Whether the company has sufficient distributable profits
B. Whether the company's bank requires notification
C. Whether the dividend increases revenue
D. Whether the dividend changes the company's accounting policies
Answer: A
Rationale: A company may only make a lawful distribution out of distributable profits. The
availability of cash alone does not establish that a dividend can legally be paid.
3. A client asks an adviser to recommend a tax planning arrangement solely because it
produces the lowest possible tax liability, despite significant commercial uncertainty. What
should the adviser do?
A. Recommend the arrangement because minimising tax is always the client's objective
B. Recommend the arrangement but omit the commercial risks
C. Evaluate the commercial, legal, ethical and tax consequences before advising
D. Proceed if the arrangement has been used by another client
Answer: C
,Rationale: Professional advice must consider the client's wider objectives, commercial
consequences, legal requirements and ethical responsibilities rather than focusing exclusively
on tax minimisation.
4. A company plans to acquire a trading subsidiary. The subsidiary owns both trading
assets and an investment property. Why is the distinction important when assessing the
transaction?
A. Investment property can never be acquired by a company
B. The investment property may receive different tax treatment from the trading assets
C. Trading assets are automatically exempt from tax
D. The distinction only affects management accounts
Answer: B
Rationale: Different categories of assets can have materially different tax consequences. The
investment property therefore requires separate consideration when evaluating the
acquisition structure.
5. A company is profitable but is experiencing severe cash-flow pressure because customers
are paying substantially later than agreed. Which management action is MOST directly
aimed at addressing the immediate problem?
A. Increase the company's depreciation charge
B. Extend supplier payment periods without negotiation
C. Tighten credit control and accelerate collection of receivables
D. Increase the company's dividend payment
Answer: C
Rationale: Accelerating receivable collections directly improves operating cash flow. The issue
is a working-capital problem rather than an accounting-profit problem.
6. A business has forecast a significant increase in sales following the launch of a new
product. The finance director wants to rely entirely on the forecast when deciding whether
to increase production capacity. What is the BEST response?
A. Approve the investment because sales forecasts are objective
B. Assess forecast assumptions, sensitivity and downside scenarios
C. Ignore the forecast and use last year's sales only
D. Increase capacity immediately because higher sales always improve cash flow
Answer: B
,Rationale: Investment decisions should be based on the reliability of assumptions and the
potential impact of uncertainty. Sensitivity and scenario analysis can identify whether the
decision remains viable under adverse conditions.
7. A company has a highly profitable division and a loss-making division. Senior
management proposes closing the loss-making division immediately. Which information is
MOST important before making the decision?
A. Whether the loss-making division has positive contribution after avoidable costs
B. Whether the division has the largest office
C. Whether its employees have worked for the company for more than five years
D. Whether the division has the oldest equipment
Answer: A
Rationale: A division should not automatically be closed simply because it reports an
accounting loss. Its contribution after avoidable costs and the effect of closure on the rest of
the business must be considered.
8. A client is considering financing a new investment entirely through additional
borrowing. Which risk should receive particular attention?
A. The reduction in depreciation expense
B. The effect of additional interest and repayment obligations on cash flow
C. The elimination of shareholder risk
D. The automatic increase in return on assets
Answer: B
Rationale: Debt financing creates contractual interest and repayment obligations. The
business must therefore demonstrate sufficient future cash flows to service the additional
debt.
9. A company prepares a five-year strategic plan. During the second year, a major
competitor introduces a substantially cheaper product. What should management do
FIRST?
A. Continue with the original plan regardless of market conditions
B. Abandon all strategic objectives immediately
C. Reassess the assumptions underlying the strategy and evaluate alternatives
D. Increase dividends to reassure shareholders
Answer: C
, Rationale: Strategic plans should be reviewed when material external assumptions change.
Management should reassess the competitive environment and determine whether strategic
objectives or implementation need modification.
10. A business has a high gross profit margin but consistently reports weak operating cash
flows. Which explanation is MOST plausible?
A. The business may have excessive investment in working capital
B. Gross profit automatically equals cash generated
C. The company must have no receivables
D. High margins always indicate strong liquidity
Answer: A
Rationale: Profitability and liquidity are different measures. Significant increases in
receivables or inventory can absorb cash even when gross margins are strong.
11. A company is evaluating two mutually exclusive projects. Project A has the higher
accounting profit, while Project B has the higher net present value. Which project should
generally be preferred if the objective is shareholder value maximisation?
A. Project A
B. Project B
C. The project with the longer payback period
D. The project with the higher accounting depreciation
Answer: B
Rationale: Net present value directly considers relevant cash flows and the time value of
money, making it a stronger measure of value creation than accounting profit for investment
appraisal.
12. A project has a positive NPV at the company's current discount rate but becomes
negative with only a small increase in the discount rate. What does this indicate?
A. The project has no financial risk
B. The project is highly sensitive to the required return
C. The project must be accepted immediately
D. The project has a guaranteed return
Answer: B
Rationale: A small change in the discount rate materially affecting NPV indicates that project
viability is sensitive to the required return and therefore warrants additional risk assessment.
