CPA Canada Core 2 Practice Test

Start with the free CPA Canada Core 2 diagnostic or the 24 public sample questions. See how the questions connect strategy, governance, risk, finance, performance management, and management accounting before you subscribe; Finance Prep then gives you a stable, competency-mapped practice bank with timed mocks, topic drills, progress tracking, and detailed explanations across web and mobile.

Core 2 practice should connect calculations and metrics to a defensible business recommendation, not just test isolated formula recall.

Quick review: Use the Core 2 Cheat Sheet to review strategy, governance, finance, management-accounting, constraint, and recommendation traps before a timed attempt.

What Core 2 practice should test

• using cost, margin, capacity, and risk information to support a decision
• distinguishing strategy, governance, and operational-control issues
• recommending action when financial and non-financial evidence conflict
• explaining assumptions and limitations without overcomplicating the answer

What to drill after a weak Core 2 set

Use this table after a diagnostic, timed mock, or mixed set. Core 2 misses usually come from stopping at the calculation instead of turning it into a business recommendation.

24 CPA Canada Core 2 sample questions with detailed explanations

These are original Finance Prep practice questions aligned to the live CPA Canada Core 2 route and the main blueprint areas shown above. Use them to test readiness here, then continue in Finance Prep with mixed sets, topic drills, and timed mocks.

Question 1

Topic: Financial Reporting

MapleFit currently sells fitness equipment online and collects cash when customers order. Management is considering a strategic move into a national retail channel expected to add CAD 1,200,000 of sales each quarter at the same gross margin. The retailer would pay 90 days after shipment, while MapleFit would continue paying suppliers within 30 days. The CFO wants the measure that best shows the near-term financial consequence of this strategy on cash resources. Which measure is most relevant?

• A. Operating cash flow after working-capital changes, especially the increase in trade receivables.
• B. Revenue growth on the income statement from the added retail sales.
• C. Total quarterly sales orders received from the national retailer.
• D. Gross margin percentage on the added retail channel sales.

Best answer: A

Explanation: The proposed strategy may improve sales and maintain gross margin, but the CFO’s concern is the near-term effect on cash resources. Moving from cash-at-order sales to 90-day retailer credit terms creates a working-capital investment in accounts receivable, while supplier payments still occur within 30 days. Operating cash flow after working-capital changes best captures this timing difference because it reflects whether profitable sales are converting into cash. Revenue and gross margin show performance, but they do not show the cash strain caused by slower collections.

Question 2

Topic: Strategy and Governance

Northview Housing, a not-for-profit, must comply with its board-approved procurement policy for all capital projects. The board is concerned that management’s quarterly compliance report states “no procurement exceptions,” but a director has received complaints about repeated awards to one supplier.

Which compliance mechanism would best address the governance risk described?

• A. Increase the approval threshold above $50,000 so the finance committee focuses only on larger contracts.
• B. Ask the facilities manager to provide the board with a quarterly explanation of supplier selection decisions after invoices are paid.
• C. Implement a procurement workflow that aggregates related purchases by supplier and project, requires conflict-of-interest certification on each requisition, and reports exceptions to the finance committee before approval.
• D. Require all employees to complete annual training on the procurement policy and certify that they have read it.

Best answer: C

Explanation: The exhibit shows a governance risk caused by both policy circumvention and weak information flow. The purchases appear to have been split below the approval threshold, and the approving manager has a potential conflict of interest. A strong compliance mechanism should prevent or detect non-compliance before commitment, create accountability at the transaction level, and give the board or finance committee useful exception reporting. Aggregating related purchases by supplier and project addresses threshold avoidance. Transaction-level conflict certification addresses the undisclosed related-party risk. Pre-approval exception reporting gives the finance committee timely oversight rather than relying on summary spending after the fact.

Question 3

Topic: Finance

Vega Tools is revising its working-capital forecast. The analyst uses the cash investment cycle as: inventory days + receivable days − payable days.

Current working-capital metrics:

Under the proposal, suppliers will offer terms of 2/10, net 30, and management plans to take the discount on all purchases. The draft forecast leaves payable days at 30 and concludes the proposed cash investment cycle remains 60 days. Which correction is best?

• A. Use 10 payable days, revise the proposed cash investment cycle to 80 days, and identify financing for 20 additional days if the discount is taken.
• B. Recommend rejecting the supplier discount because any reduction in payable days is always worse than the related purchase-cost saving.
• C. Keep 30 payable days because the invoice due date remains net 30, and reflect the 2% discount only in the income forecast.
• D. Change receivable days back to 38 until the new credit procedures are proven, and revise the proposed cash investment cycle to 68 days.

Best answer: A

Explanation: The cash investment cycle measures how long cash is tied up in operations: inventory days plus receivable days, less payable days. The current cycle is 52 + 38 − 30 = 60 days. If management takes the supplier discount, it must pay in 10 days, not 30 days. The proposed cycle is therefore 60 + 30 − 10 = 80 days. The inventory increase and receivable improvement offset each other, but the shorter payable period lengthens the cash investment cycle by 20 days. Discount savings may still make the policy attractive, but the working-capital forecast must separately show the additional financing need caused by earlier supplier payment.

Question 4

Topic: Management Accounting

FreshFork Catering has 1,200 chef-hours available next month, and fixed costs will not change. Management wants to maximize contribution margin while meeting all committed corporate lunch service levels; unsatisfied demand is lost.

Which production decision best supports management’s objective?

• A. Produce 2,000 corporate lunches and 700 event platters.
• B. Increase corporate lunch prices to reduce demand and use the freed capacity for event platters.
• C. Produce 3,500 corporate lunches and 325 event platters.
• D. Produce 1,600 corporate lunches and 800 event platters.

Best answer: C

Explanation: When capacity is constrained, product mix should be based on contribution margin per unit of the constrained resource, while respecting service commitments. Corporate lunches contribute $12 per order and use 0.25 chef-hours, or $48 per chef-hour. Event platters contribute $36 per order and use 1 chef-hour, or $36 per chef-hour. Therefore, FreshFork should satisfy all available corporate lunch demand first, not just the minimum commitment. Producing 3,500 lunches uses 875 chef-hours, leaving 325 chef-hours for 325 event platters. This mix maximizes contribution margin within the 1,200-hour capacity constraint and still meets the committed service level.

Question 5

Topic: Financial Reporting

Northview Products, a private manufacturer, is considering closing its in-house packaging cell and outsourcing packaging starting July 1. Management wants to tell the board: “The outsourcing decision should improve next year’s operating results and reduce assets employed, but it may create a short-term cash strain during transition.” Which source would best support that conclusion?

• A. The fixed asset subledger showing original cost, accumulated depreciation, and net book value for packaging equipment.
• B. The current-year packaging cell variance report comparing actual labour and supplies to budget.
• C. A supplier quotation showing the per-unit outsourcing fee at next year’s forecast production volume.
• D. An incremental impact schedule comparing avoided internal costs, supplier fees, severance, equipment disposal, lease exit costs, and monthly payment timing.

Best answer: D

Explanation: A governing body needs decision-useful financial impact, not isolated data points. The conclusion refers to three effects: operating results, assets employed, and short-term cash flow. The best support is therefore an integrated incremental schedule that compares what changes if packaging is outsourced: avoided costs, new supplier costs, one-time exit costs, asset disposal effects, and timing of cash receipts and payments. This allows management to explain whether profitability improves, whether the statement of financial position changes, and whether transition liquidity is a concern. A single quote, variance report, or asset listing may be relevant background, but each supports only part of the conclusion.

Question 6

Topic: Strategy and Governance

Northern Build Ltd. is a private contractor whose 2026 objective is to grow municipal infrastructure revenue while protecting its reputation and remaining eligible for public tenders. Its ethics policy prohibits gifts to procurement staff, requires pre-approval of any client entertainment over $100, requires annual certification, and provides an anonymous hotline.

2025 compliance dashboard:

Which interpretation best evaluates the policy’s effectiveness in supporting Northern Build’s objectives?

• A. The policy is ineffective solely because hotline reports increased, proving that misconduct is worsening across the organization.
• B. The policy communicates expectations, but it is not fully effective because repeated breaches were not enforced, undermining reputation and tender eligibility.
• C. The policy is effective because no cash bribes were identified and entertainment was addressed through a pre-approval process.
• D. The policy is effective because training and certification completion rates show that employees are aware of the required conduct.

Best answer: B

Explanation: A code of conduct or ethics policy supports entity objectives only if it is communicated, monitored, enforced, and aligned with incentives and accountability. Northern Build has strong awareness indicators: training and certifications are nearly complete. However, the more important effectiveness evidence is that substantiated breaches repeated under the same sales manager, discipline was waived for sales performance, and municipal tender feedback directly linked supplier integrity to a lost competitive position. This indicates the policy is not operating effectively as a compliance mechanism or accountability program. The policy may exist on paper, but management’s response weakens ethical culture and conflicts with the objective of maintaining reputation and eligibility for municipal work.

Question 7

Topic: Finance

Prairie Medical Devices Inc. needs $600,000 to acquire specialized production equipment with a five-year useful life. Management has ranked its financing objectives as follows: preserve existing shareholders’ voting control, avoid required principal-type cash payments during the first 12 months while sales ramp up, match the financing term to the equipment life, and obtain tax-deductible financing costs where possible. The company expects taxable income.

Which financing option should be characterized as most consistent with Prairie’s objectives?

• A. The five-year equipment lease
• B. The common share issue
• C. The equipment term loan
• D. The demand operating line

Best answer: A

Explanation: Financing suitability should be assessed against the entity’s ranked objectives, not only the lowest stated rate. The equipment lease best aligns with Prairie’s priorities because it does not dilute shareholder control, avoids required payments during the first 12 months, and matches the five-year useful life of the equipment. It also offers tax-deductible financing charges, which is useful because the company expects taxable income. Although its implicit cost is higher than the term loan or operating line, those alternatives conflict with more important objectives. A financing option with a lower rate can be a poor fit if it creates liquidity pressure, mismatches the asset being financed, or undermines ownership objectives.

Question 8

Topic: Management Accounting

LumiCo has one production bottleneck. Monthly demand exceeds available capacity for each product, fixed costs will not change, and management’s objective is to maximize monthly profit at current prices.

Which product-mix presentation best supports LumiCo’s profitability and capacity objectives?

• A. Alpha should be ranked first because it has the highest contribution margin per unit.
• B. All three products should be ranked equally because each product has a positive contribution margin.
• C. Gamma should be ranked first because it uses the fewest bottleneck hours per unit.
• D. Beta should be ranked first because it has the highest contribution margin per bottleneck hour.

Best answer: D

Explanation: When demand exceeds available capacity and one resource is the bottleneck, product mix should be based on contribution margin per unit of the constrained resource, not total selling price or contribution per unit. The objective is to earn the most contribution from each scarce bottleneck hour. Alpha’s contribution margin is $48 per unit, but it requires 2.00 hours, giving $24 per bottleneck hour. Beta’s contribution margin is $45 per unit and requires 1.25 hours, giving $36 per bottleneck hour. Gamma’s contribution margin is $15 per unit and requires 0.50 hours, giving $30 per bottleneck hour. Therefore, Beta should receive the highest priority if no other service-level, strategic, or contractual constraints are stated.

Question 9

Topic: Financial Reporting

A private manufacturing company reports under ASPE and is finalizing its December 31 year-end statements for its bank. Management is considering the following year-end tax-planning proposal:

Which conclusion is best supported by the exhibit?

• A. The purchase should be expensed immediately for financial reporting because the CCA claim reduces current-year taxable income.
• B. The purchase may provide a tax cash-flow benefit, but management must consider capitalization, amortization, loan recognition, and the potential covenant breach in the financial statements.
• C. The tax savings should be reported as operating revenue because the proposal improves current-year cash flow.
• D. The reporting implication is limited to disclosing the tax savings because the equipment is financed by debt rather than cash.

Best answer: B

Explanation: A tax-planning benefit and a financial reporting implication are related but not the same. The CCA claim may reduce taxable income and create a current cash tax saving. However, for financial reporting, the equipment is a capital asset that is amortized over its useful life, not expensed based on the tax deduction. The new term loan must also be recognized as a liability. Because the bank covenant is based on the debt-to-equity ratio and the projected ratio after the loan is 2.1, management must consider whether the tax plan creates a reporting or covenant issue even though it improves tax cash flow.

Question 10

Topic: Strategy and Governance

A SaaS equipment-monitoring company has adopted a three-year strategy to increase recurring subscription revenue, improve customer retention, and differentiate on service reliability. Management proposes the following executive KPI dashboard for monthly reporting to the board:

What recommendation is best supported by the exhibit?

• A. Replace the dashboard with only monthly revenue versus budget because financial performance is the clearest indicator of strategy success.
• B. Revise the dashboard to add strategic outcome measures such as renewal rate, churn, recurring revenue mix, service uptime, and customer satisfaction trends.
• C. Approve the dashboard because each KPI is measurable, reported monthly, and linked to operating activity.
• D. Keep the dashboard unchanged but report it quarterly so the board can focus on longer-term trends rather than monthly activity.

Best answer: B

Explanation: A KPI set should translate strategy into measures that help management and the board monitor whether the organization is achieving its long-term objectives. The proposed dashboard is measurable and operational, but it mainly counts activities or short-term efficiency: calls, demos, installations, ticket closure speed, and monthly revenue. These may be useful diagnostic measures, but they do not directly show whether customers are renewing, whether recurring revenue is growing, or whether service reliability is creating long-term differentiation. A stronger dashboard would combine selected activity measures with strategic outcome indicators such as churn, renewal rate, recurring revenue percentage, uptime, repeat purchases, net promoter score, or customer lifetime value.

Question 11

Topic: Finance

ArborClean Ltd., a private Canadian company, needs $1,800,000 to launch a subscription maintenance service. The board has stated that strategic fit and risk tolerance are more important than the lowest apparent financing cost. The CFO prepared the following exhibit:

Which financing recommendation is best supported by the exhibit?

• A. Recommend the operating line because it provides flexible funding without ownership dilution.
• B. Recommend the bank term loan because it has the lowest fixed annual cash cost while preserving cash.
• C. Recommend the supplier note plus internal cash because it meets the leverage and cash limits while preserving strategic control and rollout flexibility.
• D. Recommend the strategic investor equity because it avoids new debt and annual financing cash payments.

Best answer: C

Explanation: A financing plan should be assessed against the entity’s strategic objectives and risk tolerance, not only against the apparent financing cost. The supplier note plus internal cash is the best fit because the pro forma debt-to-EBITDA ratio is 1.83x, below the 2.0x limit, and projected minimum cash of $450,000 remains above the $400,000 threshold. It also avoids restrictions on the planned service-vehicle rollout and preserves control over brand, pricing, and customer data. The bank loan and operating line both exceed the leverage tolerance at 2.33x, and the bank loan also restricts additional service vehicles. The strategic investor improves leverage and liquidity, but it conflicts with the strategic priority to avoid material dilution and retain control over customer data and branding.

Question 12

Topic: Management Accounting

ClearWater Software sells a subscription-based scheduling app. Management’s objectives for next year are to increase annual contribution by at least $75,000, keep forecast subscriber churn at 8% or lower, and select the qualifying alternative with the highest incremental contribution. The pricing analyst prepared the following exhibit; all amounts are incremental and annual. Which alternative should be presented as best meeting management’s objectives?

• A. Activation fee for new members should be presented as the best alternative.
• B. Tiered premium subscription should be presented as the best alternative.
• C. Across-the-board price increase should be presented as the best alternative.
• D. Ad-supported low-price plan should be presented as the best alternative.

Best answer: B

Explanation: The exhibit should be interpreted against management’s stated objectives, not by selecting the highest revenue amount. Incremental contribution is incremental revenue less incremental variable costs. Alternative A generates $138,000 of contribution, but its 11% churn exceeds the 8% tolerance. Alternative B generates $94,000 of contribution and has 6% churn, so it meets both the contribution and churn requirements. Alternative C has acceptable churn, but its $71,000 contribution is below the $75,000 minimum. Alternative D also has acceptable churn, but only $22,000 of contribution. Therefore, the tiered premium subscription is the alternative that should be presented as best meeting the objectives.

Question 13

Topic: Financial Reporting

North Trail Ltd. is deciding whether to outsource deliveries starting January 1. A draft decision memo says: “The existing trucks were acquired in prior years, so they have been excluded from the recommendation.” Relevant facts: the trucks have a carrying amount of $180,000, have no alternative use, and can be sold for $120,000 cash on January 1. The recommendation must address reported performance and cash-flow effects as well as recurring operating savings. How should the truck disposal be characterized in the recommendation?

• A. As a financing inflow of $120,000 because the proceeds will help fund the outsourcing transition.
• B. As a recurring $180,000 operating cost of the outsourcing option because the trucks were used in delivery operations.
• C. As an irrelevant sunk cost with no presentation in the recommendation because the trucks were purchased in prior years.
• D. As a non-recurring $60,000 disposal loss affecting current-period performance, with $120,000 presented as a cash inflow.

Best answer: D

Explanation: A decision recommendation should distinguish recurring operating impacts from one-time effects on reported performance and cash flows. The trucks’ original purchase is historical, but disposing of them now creates a current financial consequence: proceeds of $120,000 compared with a carrying amount of $180,000 result in a $60,000 disposal loss. That loss affects current-period performance, while the sale proceeds improve cash flow. These effects should be shown separately from the ongoing comparison of outsourcing costs versus internal delivery savings so management can understand both the operational decision and its financial statement consequences.

Question 14

Topic: Strategy and Governance

Harbour Youth Centre is a not-for-profit with a mandate to provide free after-school programs for low-income youth. A corporate sponsor has offered funding for a branded sports tournament that would generate a 10% unrestricted surplus, but the tournament would require cancelling one tutoring program that currently serves 80 youth and is the main outcome in a government grant agreement. The board wants to improve long-term financial sustainability without weakening its mandate. Which recommendation best reflects how the not-for-profit context affects stakeholder value?

• A. Reject the sponsorship because not-for-profit organizations should avoid revenue-generating activities.
• B. Accept the sponsorship because generating the highest surplus is the primary measure of stakeholder value.
• C. Allow the corporate sponsor to choose which program is cancelled because it is providing incremental funding.
• D. Assess whether the sponsorship can be modified to preserve tutoring outcomes while improving reserves, and proceed only if mission impact and funding obligations are maintained.

Best answer: D

Explanation: In a not-for-profit, the overall objective is not to maximize profit; it is to achieve the mission sustainably for beneficiaries, funders, and the community. Financial surplus and reserves matter because they support continuity, but they are not the sole measure of stakeholder value. Here, cancelling the tutoring program would reduce service to low-income youth and threaten a key government grant outcome. The best response is to test whether the sponsorship can be structured to improve financial sustainability without weakening mission delivery or breaching stakeholder obligations.

Question 15

Topic: Finance

Riverside Components Inc. is considering a 20% sales-growth plan for next year that would require additional inventory purchases early in the year. The bank operating line limit is $800,000. Management says the plan is low risk because the current ratio is above benchmark.

Which conclusion is most useful for management and board decision making?

• A. Approve the growth plan because the gross margin and current ratio both exceed benchmark.
• B. Reduce prices immediately because the main problem is revenue growth below industry expectations.
• C. Replace long-term financing with the operating line because current assets exceed current liabilities.
• D. Condition the growth plan on improving collections and inventory turnover and confirming short-term financing capacity.

Best answer: D

Explanation: The most decision-useful conclusion looks beyond one favourable ratio. Although revenue and gross margin improved and the current ratio is above benchmark, liquidity quality has weakened. The quick ratio is below benchmark, receivables and inventory are turning much more slowly, operating cash flow is negative, and the operating line is almost fully used. A sales-growth plan requiring more inventory would likely increase the working-capital strain unless collections, inventory management, and financing capacity are addressed first. The board should therefore focus on whether management can fund and control growth, not simply whether accounting current assets exceed current liabilities.

Question 16

Topic: Management Accounting

Northstar Components is evaluating a one-time order for 2,000 units of Product X. Current monthly production is 10,000 units, and unused capacity allows production up to 13,000 units with no change in fixed costs. The order will not affect regular sales and has no special setup or delivery costs.

What incremental manufacturing cost should Northstar use to assess the one-time order?

• A. $23,000
• B. $33,000
• C. $40,000
• D. $20,000

Best answer: A

Explanation: Cost behaviour and cost traceability answer different questions. Traceability identifies whether a cost can be directly linked to a cost object, such as Product X. Cost behaviour identifies whether the total cost changes with activity. For this order, the relevant incremental manufacturing costs are the variable costs that will increase for 2,000 additional units. Direct materials and assembly labour are both direct and variable, so they are included. Plant utilities are indirect but variable, so they are also included. The supervisor salary is direct to Product X but fixed within the relevant range, and the factory rent allocation is indirect and fixed, so neither changes because of the order.

Question 17

Topic: Financial Reporting

HarbourTech Ltd. reports under IFRS, and its bank covenant defines debt and equity using the audited IFRS financial statements. To finance a new production line, management issued $3,000,000 of preferred shares. The terms require HarbourTech to redeem the shares for cash at par in five years and pay a fixed 6% annual distribution; HarbourTech has no unconditional right to avoid either cash payment. Management recorded the issue as equity because the instruments are legally shares. What is the best interpretation of the financial reporting consequence?

• A. The preferred shares should remain in equity because legal share capital determines presentation, with the 6% distributions charged to retained earnings.
• B. The preferred shares should remain in equity until the redemption date is within 12 months, then be reclassified as a current liability.
• C. The preferred shares can be presented as equity if the redemption obligation is clearly disclosed in the notes to the financial statements.
• D. The preferred shares should be classified as a financial liability, so leverage and finance costs will be higher than management’s presentation indicates.

Best answer: D

Explanation: Financial reporting classification depends on the substance of the instrument, not only its legal form or management’s financing objective. Under IFRS, an instrument is a financial liability when the issuer has a contractual obligation to deliver cash. HarbourTech must redeem the preferred shares for cash and must make fixed annual distributions, so it does not have the discretion normally associated with equity. Presenting the issue as equity would understate liabilities, overstate equity, and make the bank covenant ratio appear stronger than it is. The related distributions would be treated as finance costs rather than ordinary dividends on equity.

Question 18

Topic: Strategy and Governance

MapleGear Inc. has a strategic objective for the year: “Grow online sales while protecting customer experience.” The board approved these dashboard benchmarks for the quarter:

How should management characterize the KPI results in the board report?

• A. Performance is partially supportive because growth and margin exceeded benchmark, but customer experience KPIs are below benchmark and require corrective action.
• B. Performance cannot be assessed because financial and non-financial KPIs should not be presented together.
• C. The strategic objective is fully supported because online revenue growth and gross margin both exceeded benchmark.
• D. Corrective action should focus mainly on discounting because gross margin exceeded benchmark while customer satisfaction was below benchmark.

Best answer: A

Explanation: KPI interpretation should be tied directly to the stated strategic objective and approved benchmarks. MapleGear’s objective has two linked parts: growing online sales and protecting customer experience. The financial and growth indicators are favourable because revenue growth and gross margin exceed their benchmarks. However, the customer experience indicators are unfavourable because on-time delivery and satisfaction are below benchmark. Therefore, the dashboard should not present the strategy as fully achieved. The best characterization is partial support with a need for corrective action, likely focused on fulfilment reliability and online customer experience rather than only financial results.

Question 19

Topic: Finance

North Ridge Ltd. is preparing a cash-flow forecast to support a financing plan for a warehouse expansion. Management wants assumptions that can be defended to the board and lender.

Which financing-plan assumption should be challenged as unsupported by the provided facts?

• A. A $150,000 equity contribution can be included as available financing before the equipment purchase.
• B. The existing operating line can be renewed at its current $400,000 limit if forecast covenant compliance is maintained.
• C. A $100,000 government grant should be treated as confirmed financing for the expansion.
• D. A term loan of approximately $420,000 for equipment may be available, but only subject to credit approval and appraisal.

Best answer: C

Explanation: A reasonable financing assumption should be tied to evidence such as a written lender indication, stated conditions, approved equity, or a supportable forecast. The existing line renewal is supported because the lender provided a written condition and the forecast meets it. The equipment loan assumption is also supportable if presented cautiously as conditional, since the lender indicated up to 70% of the $600,000 cost, or $420,000, subject to approval and appraisal. The owner contribution is supported by a signed board resolution. The government grant is different: no approval has been received and the program is oversubscribed. It may be disclosed as a possible upside or sensitivity, but it should not be treated as confirmed financing.

Question 20

Topic: Management Accounting

Northland Retail is building a monthly dashboard to compare each store’s sales per labour hour and staffing patterns. The controller proposes uploading named employee timesheets, wage rates, sick-leave notes, and customer loyalty purchase histories to a cloud analytics vendor without a reviewed confidentiality agreement. The dashboard would be accessible to all store managers. Customer loyalty consent covers discounts and product recalls only. How should the proposed data use be characterized?

• A. An inappropriate privacy and control issue because identifiable data exceeds consent, confidentiality, access-control, and decision-usefulness needs.
• B. A suitable access-control design because store managers need detailed employee and customer data to benchmark results.
• C. An acceptable internal management use because the dashboard supports performance monitoring.
• D. A data-quality issue only because payroll and loyalty data come from different systems.

Best answer: A

Explanation: Management accounting information must be useful for the decision while respecting confidentiality, privacy, consent, and need-to-know access. Here, the stated decision is to compare store-level sales per labour hour and staffing patterns. That objective can be met with aggregated or de-identified store-level sales and labour-hour data. Named employee details, sick-leave notes, wage rates, and customer purchase histories are excessive for that purpose. Sharing the data with a vendor without reviewed confidentiality terms and giving all store managers broad access further weakens control. The appropriate characterization is an inappropriate proposed data use, not merely a useful dashboard initiative.

Question 21

Topic: Financial Reporting

Silva Furniture Inc., a private company using ASPE, is considering a strategy to exit its office-chair line and sell the dedicated moulding equipment after year-end. The board will decide before year-end. The equipment is carried at $820,000, and the proposed plan uses an independent broker’s expected proceeds of $510,000. The company’s bank covenant is based on year-end ASPE shareholders’ equity. The CFO’s draft recommendation discusses only the forecast cash savings and says no stakeholder communication is needed until the sale occurs. What should the controller do next to complete the analysis for the board?

• A. Delay the reporting analysis until the annual financial statements are being prepared.
• B. Record a liability immediately for all forecast operating losses from the office-chair line.
• C. Assess and quantify the potential impairment, equity, and covenant impact if the exit plan is approved, and flag whether stakeholder communication will be required.
• D. Approve the draft recommendation because the financial statements are unaffected until the equipment is sold.

Best answer: C

Explanation: A strategic action can create a financial reporting consequence that management should consider before approving or communicating the action. Here, the proposed exit plan relies on expected proceeds of $510,000 for equipment carried at $820,000. If the board approves the plan before year-end, this may indicate impairment and could reduce reported shareholders’ equity. Because the bank covenant is based on year-end ASPE equity, the consequence may affect a key stakeholder. The next step is to assess and quantify the potential reporting and covenant impact and identify whether it must be communicated, not to wait until the sale occurs or focus only on cash savings.

Question 22

Topic: Strategy and Governance

A private company has a procurement policy requiring three written supplier quotes before any purchase over $25,000. The policy is available on the intranet and covered in new manager training. Accounts payable prepares a monthly exception report showing purchases over the threshold with fewer than three quotes. For six months, the same managers have appeared on the report, but the report is sent to the CFO “for information only” and no one is assigned to follow up. How should this compliance issue be characterized?

• A. A monitoring problem
• B. An accountability problem
• C. A policy communication problem
• D. A policy-existence problem

Best answer: B

Explanation: Compliance weaknesses should be classified based on where the compliance process breaks down. A policy-existence problem occurs when the required rule or standard is missing or incomplete. A communication problem exists when employees are not informed of the policy or do not know how it applies. A monitoring problem occurs when compliance is not tracked or exceptions are not identified. Here, the policy exists, managers are trained, and accounts payable identifies exceptions monthly. The weakness is that repeated breaches are not assigned to anyone for follow-up, escalation, or corrective action. That makes it an accountability problem.

Question 23

Topic: Finance

Pine Coast Furniture Ltd. is preparing a financing plan for the board to fund a seasonal inventory build and a new cutting machine. The controller is reviewing the finance manager’s draft assumptions.

Which financing assumption should the controller identify as unsupported by the exhibit?

• A. The cutting machine should be considered for term financing rather than the operating line because it has a seven-year useful life.
• B. The seasonal inventory build should be treated as a short-term working-capital need because the cash shortfall reverses by September.
• C. The bank can be assumed to increase the operating line enough to fund the seasonal shortfall because the current-ratio covenant is met.
• D. Additional operating-line availability should depend on the bank’s margin formula applied to eligible receivables and inventory.

Best answer: C

Explanation: A reasonable financing assumption must be supported by the facts, lender terms, and timing of cash flows. The seasonal shortfall is a working-capital need because it is expected to reverse through collections by September. The machine’s long useful life supports considering term financing rather than using a revolving operating line. However, assuming the bank will increase the line is not supported. The bank only confirmed covenant compliance; it has not approved an increase. Also, the borrowing base at the June peak is 75% of $900,000 plus 40% of $800,000, or $995,000, while the forecast draw after the seasonal shortfall would be $1.09 million. The controller should challenge the assumption and obtain lender confirmation or revise the financing plan.

Question 24

Topic: Management Accounting

Riverview Components currently makes 8,000 sensor housings per year. A supplier has offered to sell the housings for $38 per unit. If Riverview buys the housings, there will be no quality or delivery differences, direct labour positions will be eliminated, and the freed equipment can be leased to another company for $18,000 per year.

Current annual cost to make the housings:

What is the annual differential cost or benefit of buying the housings instead of making them?

• A. Buying creates an annual differential benefit of $24,000.
• B. Buying creates an annual differential cost of $8,000.
• C. Buying creates an annual differential cost of $26,000.
• D. Buying creates an annual differential benefit of $42,000.

Best answer: B

Explanation: Differential analysis includes only costs and benefits that change between alternatives. The relevant cost to continue making is the avoidable cost: direct materials of $120,000, direct labour of $96,000, variable overhead of $32,000, and avoidable fixed overhead of $30,000, for a total of $278,000. The allocated facility fixed overhead is not relevant because it will continue either way. If Riverview buys, it will pay 8,000 × $38 = $304,000, but it will also earn incremental lease revenue of $18,000. The net relevant cost of buying is therefore $286,000. Buying is $8,000 more costly than making, so it creates an annual differential cost of $8,000.

Core 2 answer checklist

Mini Glossary

• Contribution margin: Selling price minus variable cost; useful for short-term decisions.
• Constraint: A scarce resource that limits output or choice.
• Budgetary slack: Intentional understatement of capacity or overstatement of costs in a budget.
• Transfer price: The price used for transactions between divisions of the same organization.

Related CPA Canada routes

• CPA Canada Core 1
• CPA Canada Performance Management
• CPA Canada Finance
• CPA Canada CFE Day 3

Focused sample questions

Use these child pages when you want focused Finance Prep practice before returning to mixed sets and timed mocks.

• Free CPA Canada Core 2 Full-Length Practice Exam
• CPA Canada Core 2 Cheat Sheet
• CPA Canada Core 2: Financial Reporting
• CPA Canada Core 2: Strategy and Governance
• CPA Canada Core 2: Management Accounting
• CPA Canada Core 2: Finance

In this section

• CPA Canada Core 2: Financial Reporting
  Try 10 focused CPA Canada Core 2 questions on Financial Reporting, with answers and explanations, then continue with Finance Prep.
• CPA Canada Core 2: Strategy and Governance
  Try 10 focused CPA Canada Core 2 questions on Strategy and Governance, with answers and explanations, then continue with Finance Prep.
• CPA Canada Core 2: Management Accounting
  Try 10 focused CPA Canada Core 2 questions on Management Accounting, with answers and explanations, then continue with Finance Prep.
• CPA Canada Core 2: Finance
  Try 10 focused CPA Canada Core 2 questions on Finance, with answers and explanations, then continue with Finance Prep.
• Free CPA Canada Core 2 Full-Length Practice Exam: 75 Questions
  Try 75 free CPA Canada Core 2 questions across the exam domains, with answers and explanations, then continue in Finance Prep.
• CPA Canada Core 2 Cheat Sheet
  Review a compact CPA Canada Core 2 cheat sheet for strategy, governance, finance, management accounting, performance measures, constraints, and business recommendations before Finance Prep practice.