CMA Practice Questions- Part 1

Cerawell Products Company is a ceramics manufacturer that is facing several challenges in its operations due to economic and industry conditions. The company is currently preparing its annual plan and budget. Which one of the following is subject to the least control by the management of Cerawell in the current fiscal year?

A competitor has achieved an unexpected technological breakthrough that has given them a significant quality advantage, and has caused Cerawell to lose market share. Cerawell has no control over the actions of its competitors; it can only respond to these actions, e.g., increase the company's research and development efforts. Cerawell has some control over the other alternatives presented.

Which one of the following should be classified as an operating activity on the statement of cash flows?

A decrease in accounts payable during the year. Changes in current assets and current liabilities are presented as operating activities on the Cash Flow Statement. The other transactions listed are investing or financing activities.

All of the following are advantages of the use of budgets in a management control system except that budgets ______.

Budget preparation forces management planning can provide performance criteria, and promotes communication and coordination within an organization. However, a budget cannot control unauthorized expenditures - these are usually caused by weak internal controls.

Dividends paid to company shareholders would be shown on the statement of cash flows as _____.

Cash flows from investing activities. The payment of dividends is a financing activity and should be presented as a cash outflow in that section of the Cash Flow Statement.

On July 15, a company entered into a three-month agreement to rent a machine the company needed to complete a special order. The machine would be delivered on August 1, and rental payments are due on the first day of each rental month. The effect this event would have on the company's July 31 financial statements would be to:

Cause no change in assets, liabilities, or income. Cash has not yet been paid and no expense was incurred before the machine arrived. A recordable transaction has therefore not yet occurred.

A company has $100 million of debt that is due in March Year 3. In December Year 2, the company entered into a non-cancelable agreement with its lender to refinance the debt with the same interest rate, and the full principal is due in December Year 5. How should the debt be classified on the December Year 2 balance sheet of the company?

Classified as a long-term liability. The debt should be classified as long-term because the Company has the intent and ability to refinance the debt and the agreement was entered into prior to the end of Year 2. Since no principal payments are due until Year 5 when there will be a lump-sum payment, the entire amount should be classified as long-term.

At the beginning of the year, a company entered into a long-term contract to build a facility for $40 million. Half of the construction would be completed each year for the next two years. At the beginning of the following year, the company received a second contract to construct a second facility for $80 million. This project will last four years with 30%, 25%, 25%, and 20% of the facility completed during the four years, respectively. If the company recognized revenue of $40 million in the second year, the method it used to account for long-term contracts was the______.

Completed-contract method under U.S. GAAP.

Which one of the following would result in a decrease to cash flow in the indirect method of preparing a statement of cash flows?

Decrease in income taxes payable. Decreases in current liabilities such as accounts payable and income taxes payable are deducted from net income when determining cash flow indicating that cash was used to decrease the balances in these accounts.

Which one of the following items could be identified on the cash flow statement prepared using the indirect method?

Depreciation related to buildings and equipment. Depreciation is shown on both the income statement and the statement of cash flows.

A company sells a product that is aimed at the broad mass market but is perceived as unique throughout its industry. The company is earning above average returns on the product. Which one of the following is the most appropriate term for the competitive strategy followed by the company?

Differentiation. The differentiation strategy is aimed at the broad mass market and involves the creation of a product or service that is perceived throughout its industry as unique. Differentiation is a viable strategy for earning above-average returns in a specific business because the resulting brand loyalty lowers customers' sensitivity to price. Increased costs can usually be passed on to the buyers.

21. The presentation of the major classes of operating cash receipts (such as receipts from customers) less the major classes of operating cash disbursements (such as cash paid for merchandise) is best described as the_____

Direct method of calculating net cash provided or used by operating activities. The direct method of calculating cash flow from operating activities presents major classes of operating cash receipts less major classes of operating cash disbursements.

A company is in the process of developing its mission statement. Which one of the following is least appropriate for a company's mission statement?

Explaining the tactics for increasing market share in a specific region. The determination of organizational objectives is the first step in the planning process. A mission statement is a formal, written document that defines the organization's purpose in society, for example, to produce and distribute certain goods of high quality in a manner beneficial to the public, employees, shareholders and other constituencies. Therefore, a mission statement does not announce specific operating plans. It does not describe strategies for technological development, market expansion or product differentiation because these are tasks for operating management.

All of the following are classifications on the statement of cash flows except ______.

Financing activities. The Cash Flow Statement does not have an "equity activities" section; equity transactions are presented as financing activities.

The purchase of fixed assets should be accounted for on the statement of cash flows as a(n) _______.

Financing activity. The purchase of fixed assets is considered as an investing activity on the statement of cash flows.

When using the statement of cash flows to evaluate a company's continuing solvency, the most important factor to consider is the cash

Flows from (used for) operating activities. A company's solvency is best represented by the amount of cash that can be generated internally rather than having to borrow from outside sources. This is shown on the Cash Flow Statement as flows from operating activities.

The major objectives of budgeting are to ______.

Foster the planning of operations, provide a framework for performance evaluation, and promote communication and coordination among the organization's segments. A budget is a realistic plan for the future expressed in quantitative terms. The process of budgeting forces a company to establish goals, determine the resources necessary to achieve those goals and anticipate future difficulties in their achievement. A budget is also a control tool because it establishes standards and facilitates comparison of actual and budgeted performance. Since a budget establishes standards and accountability, it motivates good performance by highlighting the work of effective managers. Moreover, the nature of the budgeting process fosters communication of goals to company subunits and coordination of their efforts. Budgeting activities by entities within the company must be coordinated because they are interdependent. Thus, the sales budget is a necessary input to the formulation of the production budget. In turn, production requirements must be known before purchases and expense budgets can be developed and all other budgets must be completed before the preparation of the cash budget.

Which one of the following transactions would affect retained earnings but not additional paid-in capital?

Impairment of a long-term asset. This results in a loss on the income statement that would reduce retained earnings but not affect paid-in capital.

The most commonly used method for calculating and reporting a company's net cash flow from operating activities on its statement of cash flows is the________

Indirect method. The two methods used to calculate the cash flow from operating activities are the direct method and the indirect method. The indirect method is used more frequently than the direct method.

A leading manufacturer of electric vehicles has accumulated customer driving interaction data through its unique pilot driver-assist program. This data will be used to further develop more advanced autonomous features that the company plans to implement in the near future on its most popular model. In integrated reporting, the system used to accumulate and analyze the driving data is best categorized as _______.

Intellectual capital. Intellectual capital represents the intangibles critical to the organization, it includes resources such as patents, copyrights, intellectual property and organizational systems.

Which one of the following statements regarding an integrated report is correct?

It should include material matters, both positive and negative. An integrated report should include all material matters, both positive and negative, in a balanced way and without material error. "a", An integrated report contains relevant information, both financial and other. "b" An integrated report should disclose information affect the organization's ability to create value over the short, medium and long term. "d" An integrated report may be either a standalone report or be part of another report or communication.

The statement of shareholders' equity shows a _______.

Listing of all shareholders' equity accounts and their corresponding dollar amounts. Firms are required to present reconciliations of the beginning and ending balances of their shareholder accounts; this is accomplished by presenting a Statement of Shareholders' Equity.

The information reported in the statement of cash flows should help investors, creditors, and others to assess all of the following except the_______

Management with respect to the efficient and profitable use of the firm's resources. The statement of cash flows report cash inflows, outflows, and net changes in cash resulting from operating, investing and financing activities. This can also include certain noncash activities. The statement of cash flows does not provide sufficient information to evaluate the performance of management with respect to the uses of the firm's resources.

The financial statements included in the annual report to the shareholders are least useful to which one of the following?

Managers in charge of operating activities. The annual report to shareholders is prepared in accordance with generally accepted accounting principles and is designed to provide information that is pertinent to investors and other external users. Managers responsible for operating activities use internal reports designed to provide information about various aspects of internal functions that measure the effectiveness and efficiency of operation.

The management of a company has just completed a thorough review of its strategic goals and formulated the company's long-term plan and short-term objectives. The most appropriate next step for the company is the development of a _______.

Master budget. A master budget translates the organization's short-term objectives into action steps. An organization determines short-term objectives for the budget period based on strategic goals, long-term objectives and plans, operating results of past periods, and expected future operating and environmental factors including economic, industry, and marketing conditions.

The concurrent action of basic competitive forces as defined by Porter's 5 forces model determines the______.

Michael Porter developed a comprehensive model of the structure of industries and competition. One feature is his analysis of the five competitive forces that determine long-term profitability measured by long-term return on investment. This analysis determines the attractiveness of an industry.

Under U.S. GAAP, which one of the following statements best describes the effects on the financial statements resulting from a change in the accounting classification for a security from available-for-sale to held-to-maturity?

Net income will not be impacted in the future by unrealized gains/losses. Unrealized gains/losses on debt securities classified as available-for-sale securities are recognized in comprehensive income, whereas they are not recognized in either net income or comprehensive income if the debt security is classified as a held-to-maturity security. Therefore, in this case the recognition of unrealized gains/losses in other comprehensive income will discontinue, which means the balance sheet will no longer be impacted as well.

When a fixed asset is sold for less than book value, which one of the following will decrease?

Net profit. The sale of a fixed asset for less than book value will decrease net profit, as the loss on the sale will be recognized on the Income Statement.

Kelli Company acquired land by assuming a mortgage for the full acquisition cost. This transaction should be disclosed on Kelli's Statement of Cash Flows as a(n)

Non-cash financing and investing activity. This transaction would be presented as a non-cash financing and investing activity as the full amount of the acquisition cost was mortgaged.

25. During the year, Deltech Inc. acquired a long-term productive asset for $5,000, and also borrowed $10,000 from a local bank. These transactions should be reported on Deltech's Statement of Cash Flows as______

Outflows for Investing Activities, $5,000; Inflows from Financial Activities, $10,000. Deltech's $5,000 acquisition of a productive asset is an outflow for investing activities, while the bank loan is an inflow for financing activities.

All of the following are limitations to the information provided on the statement of financial position except the:

Quality of the earnings reported for the enterprise. The quality of the earnings reported for the enterprise cannot be determined from the Income Statement and is therefore a limitation of that statement. All of the other characteristics listed refer to limitations of the Statement of Financial Position.

Finer Foods Inc., a chain of supermarkets specializing in gourmet food, has been using the average cost method to value its inventory. During the current year, the company changed to the first-in, first-out method of inventory valuation. The president of the company reasoned that this change was appropriate since it would more closely match the flow of physical goods. This change should be reported on the financial statements as a:

Retroactive-effect type accounting change. Finer Foods' change in inventory method should be presented on a retrospective basis to maintain consistency and comparability.

A fundamental difference between U.S. GAAP and IFRS is that_____

Reversal of inventory write-downs is permitted under IFRS; however, reversal of inventory write-downs is prohibited under U.S. GAAP.

All of the following are elements of an income statement except

Shareholders' equity. Shareholders' Equity is presented on the Statement of Financial Position (Balance Sheet) while all the other elements listed are components of the Income Statement.

The financial statement that provides a summary of the firm's operations for a period of time is the_______.

Statement of financial position. The purpose of the Income Statement is to provide a summary of a firm's operating activities for a period of time.

For a corporation that is subject to the U.S. Income Tax Code and reports its financial results in accordance with U.S. GAAP, which one of the following requires the recognition of a deferred tax liability?

Subscriptions received in advance and accounted for ratably over the subscription term. A deferred tax liability is recognized to reflect the difference between the accounting treatment under U.S. GAAP and tax regulations that will result in higher taxes payable in the future. In option "d" income is recognized earlier for U.S. GAAP purposes than for tax purposes, i.e., taxable income is higher in the future and therefore taxes are higher in the future.

When properly developed and administered, budgets provide the following advantages to the organization except to _______.

Successful Budgets would provide all the advantages mentioned except to ensure profit to the organization.

The management of a food-processing company is analyzing its internal strengths and weaknesses as part of its strategic planning process. Which one of the following is most likely considered a strategic internal variable for the company?

The culture at the company's food-processing plant. Internal environmental variables for a company include a company's culture, structure and resources. External environmental factors include economic forces, political-legal forces, technological forces and sociocultural forces.

16. A statement of cash flows, prepared using the indirect method would have cash activities listed in which of the following orders?

- Operating - Investing - Financing The order in which cash activities should be listed on the Cash Flow Statement is Operating Activities, Investing Activities, and Financing Activities.

An income statement could be used by an external investor for all of the following purposes except to______.

Analyze the company's performance compared to the budget. An external user would not have access to the company's budgeted numbers.

A statement of financial position provides a basis for all of the following except_______.

Assessing liquidity and financial flexibility. The Income Statement is used to determine a firm's profitability and past performance can be evaluated using prior period income statements. All of the other characteristics listed can be determined from the Statement of Financial Position

After leading the market for the past decade, the growth of product ABC is slowing down. In this stage of its life cycle, the product is still generating significant amounts of cash flows that cover the company's investment into new product innovations. According to the BCG Growth-Share Matrix, product ABC is most likely an example of a ______.

Cash cow. Product ABC is an example of a cash cow. It is a high-market share (dominating the market for the past decade) but low growth (continuously slowing down) product. It also generates a huge amount of cash flows.

A change in the estimate for bad debts should be:

Treated as affecting only the period of the change. A change in estimate for bad debts should be treated as affecting only the period of the change. Changes in estimates are viewed as normal recurring corrections and retrospective treatment is prohibited.