Title: Financial & Managerial Accounting for MBAs: Comprehensive Revision Tests with Rationale

Below is a sample revision test designed for MBA students using the “Financial
& Managerial Accounting for MBAs, 6th Edition” text. Each question is followed
by an explanation (rationale) and key points that would be expected in a graded
answer.


Revision Test for Financial & Managerial Accounting

Question 1: Financial vs. Managerial Accounting

(Short Answer – 10 points)
Question:
Define financial accounting and managerial accounting. Highlight at least three key differences between
the two.

Grading Guidelines & Expected Answer:

 Definition:

o Financial Accounting: The process of preparing reports for external users (investors,
regulators, creditors) in accordance with standardized frameworks (e.g., GAAP or IFRS).

o Managerial Accounting: The process of preparing internal reports used for decision-
making, planning, and control by management.

 Key Differences:

1. Audience: Financial accounting is for external stakeholders, while managerial accounting is for
internal management.

2. Regulatory Standards: Financial accounting must adhere to external standards (GAAP/IFRS);
managerial accounting is flexible and tailored to internal needs.

3. Time Orientation: Financial reports are historical; managerial reports often include forecasts
and budgets.

 Rationale:
This question assesses your understanding of the fundamental distinction between the two
fields—a crucial concept in the course. Grading would emphasize clarity, completeness
(definition plus at least three differences), and accuracy.



Question 2: Contribution Margin Concept

(Multiple Choice – 5 points)
Question:
Which of the following best defines the contribution margin?
a) Sales revenue minus fixed costs

, b) Sales revenue minus variable costs
c) Sales revenue minus total costs
d) Sales revenue minus product cost

Expected Answer:
b) Sales revenue minus variable costs

Rationale:
The contribution margin represents the amount remaining from sales revenue after covering variable
expenses. It is used to cover fixed costs and contribute to profit. The rationale for this question tests
your ability to correctly identify core managerial accounting terminology that is central to cost-volume-
profit analysis.



Question 3: Capital Budgeting – NPV vs. IRR

(Essay/Short Answer – 15 points)
Question:
Discuss why the Net Present Value (NPV) method is generally preferred over the Internal Rate of Return
(IRR) method in capital budgeting. Provide at least two reasons and explain the potential limitations of
the IRR method.

Grading Guidelines & Expected Answer:

 Reason 1 – Multiple IRRs:

o In cases of non-conventional cash flows (i.e., alternating positive and negative cash
flows), the IRR method may produce multiple IRRs, making the decision ambiguous.

 Reason 2 – Reinvestment Assumption:

o IRR assumes that intermediate cash flows are reinvested at the IRR itself, which is often
unrealistic; in contrast, NPV assumes reinvestment at the firm’s cost of capital, a more
practical rate.

 Additional Point – Scale and Timing Issues:

o NPV measures absolute value creation, accounting for the scale of the project and
timing of cash flows, while IRR provides only a rate of return that may be misleading
when comparing projects of different sizes.

 Rationale:
This question requires you to critically analyze common capital budgeting methods. The
explanation should reflect an understanding of both the mathematical underpinnings and
practical limitations of these methods. A well-graded answer would include clear examples or
references to how these limitations can affect managerial decision-making.



Question 4: Activity-Based Costing (ABC)