Level 1 - Financial Statement

Wiley CMA Test Bank Part 2#_assess_studyquestions#_getstarted
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Question 1:
(2A1-LS09)
All of the following are elements of an income statement except:

*Source: Retired ICMA CMA Exam Questions.
gains and losses.

shareholders' equity.
expenses.
revenue.
Question 2:
(2A1-LS16)
All of the following are limitations to the information provided on the statement of financial
position except the:
judgments and estimates used regarding the collectability, salability, and longevity of
assets.
lack of current valuation for most assets and liabilities.
omission of items that are of financial value to the business such as the worth of the
employees.
quality of the earnings reported for the enterprise.
Question 3:
(2A1-LS06)
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) investing activities.

balance at the end of the period.
flows from (used for) operating activities.
flows from (used for) financing activities.
Question 4:
(2A1-LS01)
Which of the following statements is true regarding common-size statements?

Common-size statements indexed over two years for two companies, with both showing
a 10% increase in profits, show that both companies would make equally attractive
investments.
All of the other three answers are correct.
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Common-size statements can be used to compare companies of different sizes.

Horizontal common-size statements can be made only for companies with at least ten
years of operational data.
Question 5:
(2A1-LS12)
The sale of available-for-sale securities should be accounted for on the statement of cash
flows as a(n):
investing activity.
financing activity.
noncash investing and financing activity.
operating activity.
Question 6:
(2A1-AT02)
In assessing the financial prospects for a firm, financial analysts use various techniques. An
example of vertical, common-size analysis is:
a comparison in financial form between two or more firms in different industries.
a comparison in financial ratio form between two or more firms in the same industry.
advertising expense is 2 percent of sales.
an assessment of the relative stability of a firm's level of vertical integration.
Question 7:
(2A1-LS08)
The financial statement that provides a summary of the firm's operations for a period of time
is the:
statement of financial position.

statement of retained earnings.
statement of shareholders' equity.
income statement.
Question 8:
(2A1-LS19)
When a fixed asset is sold for less than book value, which one of the following will decrease?
Current ratio.
Total current assets.
Net working capital.
Net profit.
Question 9:
(2A1-AT03)
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When preparing common-size statements, items on the Balance Sheet are generally stated as
a percentage of __________ and items on the Income Statement are generally stated as a
percentage of __________.
total assets; net income.
total shareholders' equity; net income.
total shareholders' equity; net sales.
total assets; net sales.
Question 10:
(2A1-CQ05)
Pierre Company had the following transactions during the fiscal year ending December 31,
year 3:
Sold a delivery van with a net book value of $5,000 for $6,000 cash, reporting a gain of
$1,000.
Paid interest to bondholders for the amount of $275,000
Declared dividends on December 31, year 3, of $.08 per share on the 1.3 million shares
outstanding, payable to shareholders of record on January 31, year 4. No dividends
were declared or paid in prior years.
Accounts receivable decreased from $70,000 on December 31, year 2 to $60,000 on
December 31, year 3.
Accounts payable increased from $40,000 on December 31, year 2 to $45,000 on
The cash balance was $150,000 on December 31, year 2, and $177,500 on December 31,
year 3.
Which of the answers below describes the correct entry for Pierre Company's statement of
cash flows on December 31, year 3 using the indirect method?
The decrease of $10,000 in accounts receivable is reported as a $10,000 decrease in the
operating section of the statement of cash flows.
The $104,000 dividend payout is represented as an outflow of funds in the financing
section.
Financing activities include the $1,000 gain from the sale of the delivery van.
The $1,000 gain from the sale of the delivery van is included in operating activities as a
deduction.
Question 11:
(2A1-AT04)
Gordon has had the following financial results for the last four years.
Which one of the following is the most likely conclusion you can draw from this information?
Gordon should consider raising prices because the cost of goods sold (COGS) has gone
up faster than sales.
Gordon should seek additional outlets for its goods to increase profitable sales.
Customers continue to see Gordon's products as a good value for the price.
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The sales growth may have been caused by inflation, not more effective marketing.
Question 12:
(2A1-CQ02)
Silver Streak Enterprises (SSE) began manufacturing latex-based paint in 1978. In 2008, the
company developed a new high quality paint which maintains its luster for over 50 years. Due
to the success of this new product, sales of the original latex-based paint have declined
significantly such that the company has decided to phase out the product in early 2009.
Mikayla Andrews is the accounting manager and her primary responsibilities include the
preparation and analysis of the annual financial statements. Mikayla has begun analyzing the
annual financial transactions and wants to ensure that the operations are presented
accurately for the fiscal year ending December 31, 2009. The following transactions have
raised questions for Mikayla:
1. SSE invented its new high quality paint in 2008 and received a patent in the same year. In
2008, the company expected that the new patent would have a useful-life of ten years;
however, due to innovations by its competitors, SSE has determined that the useful-life of the
patent will be reduced to six years beginning in 2009.
2. The year-end physical count of inventory has found $24,000 of the obsolete latex-based
paint product which must be written off as obsolete.
3. SSE is a defendant in a lawsuit concerning the durability of its old paint product line.
Corporate lawyers believe that the lawsuit against Silver Streak will probably result in a
settlement of $50,000 in mid-2010.
4. Silver Streak is also a plaintiff in a lawsuit against a competitor for stealing the
manufacturing process of their new product line. Corporate lawyers believe that the lawsuit
could likely result in a favorable judgment in the amount of $150,000 in 2010.
Explain how each of the four transactions above will affect Silver Streak's Income Statement:
Transaction 1 would decrease operating income. Transaction 2 would be classified as an
other expense and would decrease Income Before Taxes. Transaction 3 is a loss
contingency that can be reasonably estimated and would appear on the income
statement. Transaction 4 is a gain contingency that can be reasonably estimated and
would be recorded on the income statement.
Transaction 1 would decrease operating income. Transaction 2 would be classified as a
cost of goods sold and would decrease operating income. Transaction 3 is a loss
contingency that can be reasonably estimated and would appear on the income
statement. Transaction 4 is a contingency that may result in a gain and would be
recorded in the financial statements.
Transaction 1 would decrease operating income. Transaction 2 would be classified as an
other expense and would decrease Income Before Taxes. Transaction 3 is a loss
contingency that may result in a settlement and should appear in the notes but not in
the financial statements. Transaction 4 is a contingency that may result in a gain but will
not be recorded in the financial statements.
Transaction 1 would decrease operating income. Transaction 2 would classified as
other expense and decrease Income Before Taxes. Transaction 3 is a loss contingency
that can be reasonably estimated and would appear on the income statement.
Transaction 4 is a contingency that may result in a gain but would not be recorded in the
financial statements.
Question 13:
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(2A1-LS03)
The financial statements included in the annual report to the shareholders are least useful to
which one of the following?
Competing businesses.
Stockbrokers.
Managers in charge of operating activities.
Bankers preparing to lend money.
Question 14:
(2A1-CQ08)
At the end of the current fiscal year, XL Company reported net income of $40,000. In addition,
the following information is available.
Using the indirect method, what amount should be reported as cash flow from financing
activities on XL's Statement of Cash Flows for the current fiscal year?
($6,500).
($9,500).
($39,500).
($20,500).
Question 15:
(2A1-LS10)
Dividends paid to company shareholders would be shown on the statement of cash flows as:
cash flows from investing activities.

operating cash inflows.
cash flows from financing activities.
operating cash outflows.
Question 16:
(2A1-CQ07)
At the end of the current fiscal year, XL Company reported net income of $40,000. In addition,
the following information is available:
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Using the indirect method, what amount should be reported as cash flow from operating
activities on XL's Statement of Cash Flows for the current fiscal year?
$47,500.
$49,500.
$32,500.
$34,500.
Question 17:
(2A1-LS18)
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:
indirect method of calculating net cash provided or used by operating activities.

cash method of determining income in conformity with generally accepted accounting
principles.
direct method of calculating net cash provided or used by operating activities.
format of the statement of cash flows.
Question 18:
(2A1-LS14)
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):
operating activity.
noncash financing and investing activity.
financing activity.
investing activity.
Question 19:
(2A1-LS15)
Which one of the following should be classified as an operating activity on the statement of
cash flows?
The purchase of additional equipment needed for current production.

A decrease in accounts payable during the year.
The payment of a cash dividend from money arising from current operations.
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An increase in cash resulting from the issuance of previously authorized common stock.
Question 20:
(2A1-AT05)
The controller of OmniCorp asked a financial analyst to calculate common size financial
statements for the past four years. The controller is most likely looking for which of the
following?
How the company is earning its profits.
The growth rate for sales.
Trends in expenses as a percentage of sales.
How efficiently the company is using assets.
Question 21:
(2A1-CQ06)
year 3:
$1,000.
Paid interest to bondholders for the amount of $275,000
December 31, year 3.The cash balance was $150,000 on December 31, year 2, and
$177,500 on December 31, year 3
What is the net effect of taking the total cash provided (used) by operating activities, adding it
to the cash provided (used) by investing activities, and adding that to the cash provided
(used) by financing activities?
Positive cash flow of $27,500.

Negative cash flow of $371,000.
Positive cash flow of $22,500.
Negative cash flow of $366,000.
Question 22:
(2A1-CQ03)
Which of the following financial statement changes would best represent the impact of
incurring and paying interest on a note payable for the period:
Effect on Equity Section of the Balance Sheet: No effect

Statement of Cash Flows Direct Method: Outflow from Operating Activities.
Effect on Equity Section of the Balance Sheet: Decrease
Statement of Cash Flows Direct Method: Outflow from Operating Activities.
Effect on Equity Section of the Balance Sheet: No effect
Statement of Cash Flows Direct Method: Outflow from Financing Activities.
Effect on Equity Section of the Balance Sheet: Decrease
Statement of Cash Flows Direct Method: Outflow from Financing Activities.
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Question 23:
(2A1-AT01)
Gordon has analyzed these results using vertical common-size analysis to determine trends.
The performance of Gordon can best be characterized by which one of these statements?
The common-size gross profit percentage has decreased as a result of an increasing
common-size trend in cost of goods sold.
The increased trend in the common-size gross profit percentage is the result of both the
increasing trend in sales and the decreasing trend in cost of goods sold.
The common-size trend in cost of goods sold is decreasing which is resulting in an
increasing trend in the common-size gross profit percentage.
The common-size trend in sales is increasing and is resulting in an increasing trend in
the common-size gross profit margin.
Question 24:
(2A1-LS20)
Stanford Company leased some special-purpose equipment from Vincent Inc. under a longterm lease that was treated as an operating lease by Stanford. After the financial statements
for the year had been issued, it was discovered that the lease should have been treated as a
capital lease by Stanford. All of the following measures relating to Stanford would be affected
by this discovery except the:
accounts receivable turnover.

net income percentage.
debt/equity ratio.
fixed asset turnover.
Question 25:
(2A1-LS05)
The statement of shareholders' equity shows a:

reconciliation of the beginning and ending balances in the Retained Earnings account.
reconciliation of the beginning and ending balances in shareholders' equity accounts.
computation of the number of shares outstanding used for earnings per share
calculations.
listing of all shareholders' equity accounts and their corresponding dollar amounts.
Question 26:
(2A1-CQ09)
An item of inventory purchased for $30 had been incorrectly written down at the end of last
year to a current replacement cost of $22. The item is currently selling for $60, its normal
selling price. The error will affect the financial statements in which of the following ways?
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The income for this year will be overstated.

The income for this year will be unaffected.
The cost of sales for this year will be overstated.
The income for last year is overstated.
Question 27:
(2A1-LS13)
A statement of cash flows prepared using the indirect method would have cash activities
listed in which one of the following orders?
Operating, investing, financing.

Investing, financing, operating.
Financing, investing, operating.
Operating, financing, investing.
Question 28:
(2A1-LS04)
Which one of the following would result in a decrease to cash flow in the indirect method of
preparing a statement of cash flows?
*Source: Retired ICMA CMA Exam. Questions.
Decrease in income taxes payable.

Proceeds from the issuance of common stock.
Amortization expense.
Decrease in inventories.
Question 29:
(2A1-LS07)
A statement of financial position provides a basis for all of the following except:
evaluating capital structure.

assessing liquidity and financial flexibility.
determining profitability and assessing past performance.
computing rates of return.
Question 30:
(2A1-LS17)
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:
direct method.
single-step method.
multiple-step method.
indirect method.
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Question 31:
(2A1-CQ04)
year 3:
$1,000.
Paid interest to bondholders for the amount of $275,000.
The cash balance was $150,000 on December 31, year 2, and $177,500 on December 31,
year 3
Pierre Company prepared its statement of cash flows using the direct method on December
31, year 3. The interest paid to bondholders is reported:
As an outflow of cash in the investing activities section.
As an outflow of cash in the operating activities section.
As an outflow of cash in the financing activities section.
As an outflow of cash in the debt servicing activities section.
Question 32:
(2A1-LS11)
All of the following are classifications on the Statement of Cash Flows except:
investing activities.
equity activities.
operating activities.
financing activities.
Question 33:
(2A1-CQ01)
Gordon has analyzed these results using vertical common-size analysis to determine trends.
The performance of Gordon can best be characterized by which one of the following
statements?
The common-size trend in sales is increasing and is resulting in an increasing trend in
the common-size gross profit margin.
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The increased trend in the common-size gross profit percentage is the result of both the
increasing trend in sales and the decreasing trend in cost of goods sold.
The common-size gross profit percentage has decreased as a result of an increasing
common-size trend in cost of goods sold.
The common-size trend in cost of goods sold is decreasing which is resulting in an
increasing trend in the common-size gross profit percentage.
Question 34:
(2A1-LS02)
A common-size statement is helpful:

for determining the next investment the company should make.
for considering whether to buy or sell assets.
in comparing companies of different sizes.
for figuring out how assets are allocated.
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Wiley CMA Test Bank Part 2#_assess_studyquestions#_getstarted

Time Spent: 0:02

All of the following are elements of an income statement except:

gains and losses.

flows from (used for) investing activities.

Which of the following statements is true regarding common-size statements?

Wiley CMA Test Bank Part 2#_assess_studyquestions#_getstarted

Common-size statements can be used to compare companies of different sizes.

statement of financial position.

Wiley CMA Test Bank Part 2#_assess_studyquestions#_getstarted

Wiley CMA Test Bank Part 2#_assess_studyquestions#_getstarted

Wiley CMA Test Bank Part 2#_assess_studyquestions#_getstarted

cash flows from investing activities.

Wiley CMA Test Bank Part 2#_assess_studyquestions#_getstarted

indirect method of calculating net cash provided or used by operating activities.

The purchase of additional equipment needed for current production.

Wiley CMA Test Bank Part 2#_assess_studyquestions#_getstarted

Positive cash flow of $27,500.

Effect on Equity Section of the Balance Sheet: No effect

Wiley CMA Test Bank Part 2#_assess_studyquestions#_getstarted

accounts receivable turnover.

The statement of shareholders' equity shows a:

Wiley CMA Test Bank Part 2#_assess_studyquestions#_getstarted

The income for this year will be overstated.

Operating, investing, financing.

Decrease in income taxes payable.

evaluating capital structure.

Wiley CMA Test Bank Part 2#_assess_studyquestions#_getstarted

Wiley CMA Test Bank Part 2#_assess_studyquestions#_getstarted

A common-size statement is helpful:

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