CMA Part 1

External Financial Reporting Decisions

1. Long-term debt should be included in the current section of the financial position if
a. It is to be converted into common stocks before maturity.
b. It matures within the year and will be retired through the use of current assets.
c. Management plans to refinance it within the year.
d. A bond retirement fund has been set up for use in its scheduled retirement during the next year.
2. A statement of financial position provides a basis for all of the following except
a. Computing rates of return.
b. Evaluating capital structure.
c. Assessing liquidity and financial flexibility.
d. Determining profitability and assessing past performance for a specific period.
3. The financial statement that provides a summary of the firm’s operations for a period of time is the
a. Income statement.
b. Statement of financial position.
c. Statement of shareholder’s equity.
d. Statement of retained earnings.
4. Dividends paid to company shareholders would be shown on the statement of cash flows as
a. Operating cash inflows.
b. Operating cash outflows.
c. Cash flows from investing activities.
d. Cash flows from financing activities.
5. 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
a. Direct method of calculating net cash provided or used by operating activities.
b. Cash method of determining income in conformity with generally accepted accounting principles.
c. Format of the statement of cash flows.
d. Indirect method of calculating net cash provided or used by operating activities.
6. 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
a. Direct method.
b. Indirect method.
c. Single-step method.
d. Multiple-step method.
7. A statement of cash flows prepared using the indirect method would have cash activities listed in which one of
the following orders?
a. Financing, investing, operating.
b. Investing, financing, operating.
c. Operating, financing, investing.
d. Operating, investing, financing.
8. For the fiscal year just ended, Doran Electronics had the following results.

Net Income 920,000

Depreciation expense 110,000
Increase in accounts payable 45,000
Increase in accounts receivable 73,000
Increase in deferred income tax liability 16,000
 Doran’s net cash flow from operating activities is
a. 928,000
b. 986,000
c. 1,018,000
d. 1,074,000
9. Three years ago, James Company purchased stock in Zebra Inc. at a cost of 100,000. This stock was sold for
150,000 during the current fiscal year. The result of this transaction should be shown in the Investing Activities
Section of James’ statement of cash flow as
a. Zero
b. 50,000
c. 100,000
d. 150,000
10. Helicon accrued a gain from the sale of equipment for cash. The gain should be reported in the statement of
cash flows using the indirect method in:
a. Investment activities as a reduction of the cash inflow from the sale.
b. Investment activities as a cash outflow.
c. Operating activities as a deduction from income.
d. Operating activities as an addition to income.
11. The following information was taken from the accounting records of Johnson Corporation for the year ended
December 31:
Proceeds from issuance of preferred stock 8,000,000
Dividends paid non preferred stock 800,00
Bonds payable converted to common stock 4,000,000
Payment for purchase of machinery 1,000,000
Proceeds from sale of plant building 2,400,000
2% stock dividend on common stock 600,000
Gain on sale of plant building 400,000

The net cash flows from investing and financing activities that should be presented on Johnson’s statement of
cash flows for the year ended December 31 are, respectively:
a. 1,400,000 and 7,200,000
b. 1,400,000 and 7,800,000
c. 1,800,000 and 7,800,000
d. 1,800,000 and 7,200,000
12. Chelny Co. uses the indirect method in its statement of cash flows. The amortization of a patent should be
presented as a(n):
a. Cash flow from investing activity.
b. Cash flow from financing activity.
c. Deduction from net income.
d. Addition to net income.
13. Selected financial information for Kristina Company for the year just ended is shown below.
Net income 2,000,000
Increase in accounts receivable 300,000
Decrease in inventory 100,000
Increase in accounts payable 200,000
Depreciation expense 400,000
Gain on sale of available-for-sale securities 700,000
Cash receivable from the issue of common stock 800,000
Cash paid for dividends 80,000
 Cash paid for the acquisition of land 1,500,000
Cash received from the sale of available-for-sale securities 2,800,000

Assuming the indirect method is used, Kristina’s cash flow from operating activities for the year is
a. 1,700,000
b. 2,000,000
c. 2,400,000
d. 3,100,000
14. Bertram Company had a balance of 100,000 in retained earnings at the beginning of the year and 125,000 at the
end of the year. Net income for this time period was 40,000. Bertram’s statement of financial position indicated
that dividends and a stock dividend were declared. The amount of the stock dividend was 8,000. When
preparing its statement of cash flows for the year, Bertram should show cash paid for dividend as
a. 20,000
b. 15,000
c. 12,000
d. 5,000
15. Kelli Company acquired land by assuming a mortgage for the full acquisition cost. This transaction should be
disclosed on Kelli’s Statement of Cash Flow as a(n)
a. Financing activity.
b. Investing activity.
c. Operating activity.
d. Noncash financing and investing activity.
16. The net income for Hudson Co. was 3 million for the year ended December 31. Additional information is as
follows:
Depreciation on fixed assets 1,500,000
Gain from the cash sale of land 200,000
Increase in accounts payable 300,000
Dividends paid on preferred stock 400,000

The net cash provided by operating activities in the statement of cash flows for the year ended December 31
should be:
a. 4,200,000
b. 4,500,000
c. 4,600,000
d. 4,800,000

On November 15, 20X0, Senger Sewing Machine Corp. purchased a 300,000 U.S. Treasury bond with a maturity
date of January 31, 20X1. On December 31, 20X0, Senger still owned the Treasury bond. The company also had
the following other balances on December 31, 20X0:
Checking account, ABC National Bank 50,000
Money market account, ABC National Bank 100,000
U.S. Treasury bill purchased Nov. 1, 20X0, maturing Feb. 28, 20X0 500,000
Senger treats all highly liquid investments with maturities of three months or less when purchased as cash
equivalents.
17. What amount should Senger report as cash and cash equivalents on its December 31, 20X0 statement of
financial position (balance sheet)?
a. 150,000
b. 650,000
c. 450,000
 d. 950,000
18. On senger’s statement of cash flows for December 31,20X0, how should the U.S. Treasury bond be reported?
a. It should not be included.
b. As a cash outflow from investing activities.
c. As a cash outflow from lending activities.
d. As a part of the cash and cash equivalents ending balance.
19. An accountant with Nasbo Enterprises Inc. has gathered the following information in order to prepare the
statement of cash flows for the current year. Net income of 456,900 includes a deduction of 45,600 for
depreciation expense. The company issued 300,000 of dividends this year and purchased one new building for
275,000. The balance sheets from the current period and prior period included the following balances.
Prior Year Current Year
Accounts receivable, net 56,860 45,300
Accounts payable 12,900 10,745
Inventory 186,700 194,320

Using the indirect method, what is the amount of cash provided by operating activities?
a. 202,500
b. 405,205
c. 504,285
d. 521,405
20. Comprehensive income is best described as
a. Net income excluding extraordinary gains and losses.
b. The change in net assets for the period including by owners and distributions to owners.
c. Total revenue minus expenses.
d. The change in net assets for the period excluding owner transactions.

Recognition, Measurement, Valuation and Disclosure

21. Johnson Company uses the allowance method to account for uncollectible accounts receivable. After recording
the estimate of uncollectible accounts expense for the current year, Johnson decided to write off in the current
year the 10,000 account of a customer who had filed for bankruptcy. What effect does this write-off have on the
company’s net income and total current assets, respectively?
Net Income Total Current Assets
a. Decrease Decrease
b. No effect Decrease
c. Decrease No effect
d. No effect No effect
22. Fidler Company has estimated its bad debt expense by using 1% of net sales. However, the company is
contemplating aging its accounts receivable and using this as a basis for estimating its bad debts, as it is believed
that this will provide better estimate of the uncollectible accounts. The following aging schedule was prepared
as of November 30 of the current year, the end of the fiscal year.
% Estimated
Age of Account Amount To Be Uncollectible
Under 60 days 730,000 1%
61-90 days 40,000 6%
91-120 days 18,000 9%
Over 120 days 72,000 25%
 Net sales for the year were 4,200,000. There is a debit balance of 14,000 in the allowance for uncollectible
accounts made on November 30 of the current year will be for
a. 56,000
b. 43,320
c. 29,320
d. 15,320
23. Based on the industry average, Davis Corporation estimates that its bad debts should average 3% of credit sales.
The balance in the Allowance for Uncollectible Accounts at the beginning of Year 3 was 140,000. During Year 3,
credit sales totaled 10,000,000, accounts of 100,000 were deemed to be uncollectible, and payment was
received on a 20,000 account that had previously been written off as uncollectible. The entry to record bad debt
expense at the end of Year 3 would include a credit to the Allowance for Uncollectible Accounts of
a. 300,000
b. 260,000
c. 240,000
d. 160,000
24. The following information is available for a small retailer:
Beginning Balances:
Accounts Receivable 10,000
Allowance for uncollectible accounts (750)
Accounts Receivable, net 9,250
Transactions during the period:
Credit Sales 60,000
Collections on credit sales 55,000

During the period, Accounts Receivable totaling 1,000 were written off as uncollectible. This brought the balance
in the Allowance account to a debit balance of 250.
Required: Calculate the ending balance in the Allowance account and the amount that is charged to Bad Debt
Expense using the following methods:
a. Percentage of Sales - Assume that 3% of credit sales is the estimated bad debt expense. 1800;1550
b. Percentage of Outstanding Receivables - Assume that 6% of the outstanding receivables are estimated
to be uncollectible. 840;1090
25. Woody Company sold 150,000 of its accounts receivable without recourse. The purchaser assessed a finance
charge of 5%. Woody should record
a. Interest expense of 7,500.
b. A credit to liability on transferred accounts receivable of 150,000.
c. A credit to accounts receivable of 150,000.
d. A debit to cash of 150,000.
26. A firm often factors its accounts receivable. The finance company requires an 8% reserve and charges a 1.5%
commission on the amount of the receivable. The remaining amount to be advanced is further reduced by an
annual interest charge of 16%. What proceeds (rounded to the nearest dollar) will the firm receive from the
finance company at the time a 110,000 account, which is due in 60 days, is turned over to the finance company?
a. 81,950
b. 83,630
c. 96,895
d. 99,550
27. The advantage of the last-in, first-out inventory method is based on the assumption that
a. the most recently incurred costs should be allocated to the cost of goods sold.
b. costs should be charged to revenue in the order in which they are incurred.
c. costs should be charged to cost of goods sold at average cost.
 d. current costs should be based on representative or normal conditions of efficiency and volume of
operations.
28. In a period of rising prices, which one of the following inventory methods usually provides the best matching of
expenses against revenues?
a. Weighted average
b. First-in, first-out
c. Last-in, first-out
d. Specific identification
29. Which one of the following actions would result in a decrease in income?
a. Liquidating last-in, first-out layers of inventory when prices have been increasing.
b. Changing from first-in, first-out to last-in, first-out inventory method when prices are decreasing.
c. Accelerating purchases at the end of the year when using the last-in, first-out inventory method in times
of rising prices.
d. Changing the number of last-in, first-out pools.
30. In periods of rising costs, which one of the following inventory cash flow assumptions will result in higher cost of
sales?
a. First-in, first-out
b. Last-in, first-out
c. Weighted average
d. Moving average
31. The inventory method that will yield the same inventory value and cost of goods sold whether a perpetual or
periodic system is used is
a. average cost
b. first-in, first out.
c. last-in, first-out.
d. either first-in, first-out or last-in, first-out.
32. Holly Company’s inventory is overstated at December 31 of this year. The result will be
a. understated income this year.
b. understated retained earnings this year.
c. understated retained earnings next year.
d. understated income next year.
33. Which one of the following errors will result in the overstatement of net income?
a. Overstatement of beginning inventory
b. Overstatement of ending inventory
c. Overstatement of goodwill amortization
d. Overstatement of bad debt expense

The following information is for the next four questions: Addison Hardware began the month of November
with 150 large brass switch plates on hand at a cost of 4.00 each. These switch plates sell for 7.00 each. The
following schedule presents the sales and purchases of this item during the month of November.
Date of Quantity Unit Units
Transaction Received Cost Sold
November 5 100
November 7 200 4.20
November 9 150
November 11 200 4.40
November 17 220
November 22 250 4.80
November 29 100
34. If Addison uses FIFO inventory pricing, the value of the inventory on November 30 would be:
a. 936
b. 1,012
c. 1,046
d. 1,104
35. If Addison uses weighted average periodic inventory pricing, the gross profit for November will be:
a. 1,482
b. 1,516
c. 1,528
d. 1,574
36. If Addison uses periodic LIFO inventory pricing, the cost of goods sold for November will be:
a. 2,416
b. 2,442
c. 2,474
d. 2,584
37. If Addison uses perpetual LIFO inventory pricing, the value of the inventory at November 30 will be:
a. 936
b. 1,012
c. 1,046
d. 1,076
38. On January 2, Rio Corp. bought machinery under a contract that required a down payment of 10,000, plus 24
monthly payments of 5,000 each, for total cash payments of 130,000. The cash equivalent price of the
machinery is 110,000. The machinery has an estimated useful life of 10 years and an estimated salvage value of
5,000. Rio uses straight-line depreciation. In its income statement for the year ended December 31, what
amount should Rio report as depreciation expense for this machinery?
a. 10,500
b. 11,000
c. 12,500
d. 13,000
39. Sydney Co. purchased a machine that was installed and placed into service on January 1, 20X8, at a cost of
480,000. Salvage value is estimated to be 80,000, and the machine is being depreciated over 10 years using the
double declining balance method. For the year ended December 31, 20X9, what amount of depreciation
expense should Sydney report?
a. 96,000
b. 76,800
c. 64,000
d. 61,440
40. In Joan Co.'s review of long-lived assets to be held and used, an asset with a cost of 10,000 and accumulated
depreciation of 5,500 was determined to have a fair value of 3,500. Determine the amount of impairment loss to
be recognized if the expected future cash flow is (a) 5,000 or (b) 3,000.
a. 0
b. 1,500
41. East Corp. manufactures stereo systems that carry a two-year warranty against defects. Based on past
experience, warranty costs are estimated at 4% of sales for the warranty period. During 20X9, stereo system
sales totaled 3,000,000 and warranty costs of 67,500 were incurred. In its income statement for the year ended
December 31, 20X9, East should report warranty expense of:
a. 52,500
b. 60,000
c. 67,500
 d. 120,000
42. Which of the following represents a temporary difference that would be deductible on the tax return after it has
been recognized in financial income?
a. Subscription revenue received by a magazine publisher
b. Warranty liabilities
c. Payment of an insurance premium
d. A deposit received from a customer by a contractor
43. On December 31, 20X8, HomeTheater Company received a 20,000 deposit from a customer for a home theater
installation to be completed in 20X9. HomeTheater included the 20,000 in the revenue reported on its 20X8 tax
return but it reported the receipt as a liability (unearned revenue) on its 20X8 financial statements. The enacted
tax rates are 35% for 20X8 and 38% for 20X9. What amount of deferred tax asset or liability did HomeTheater
report on its balance sheet for financial reporting purposes at the end of 20X8?
a. 7,000 deferred tax asset
b. 7,000 deferred tax liability
c. 7,600 deferred tax asset
d. 7,600 deferred tax liability
44. Skies Unlimited’s 20X2 income statement had pretax financial income of 38,000 in its first year of operations.
Skies Unlimited invested in 80,000 worth of assets during 20X2. Skies uses MACRS (Modified Accelerated Cost
Recovery System) depreciation as required on its tax return and straight-line depreciation with no salvage value
for financial reporting. The equipment has a five-year life and is being depreciated over six years since Skies uses
the half-year convention. The differences between the book and tax deductions for depreciation over the six-
year depreciation period of the assets acquired in 20X2 and the enacted tax rates for 20X2 through 20X7 are as
follows:

Year Book over (under) tax Tax rates

20X2 (8,000) 30%

20X3 (9,600) 30%

20X4 640 35%

20X5 6,784 35%

20X6 6,784 35%

20X7 3,392 35%

There are no other temporary differences. Taxable income is expected in all future years. In Skies’ December
20X2 balance sheet, the deferred income tax liability and the income taxes currently payable should be:

Deferred income tax liability Income taxes currently payable

a. 3,279 11,400
b. 3,279 8,400
c. 2,800 11,400
d. 2,800 8,400
45. Griffey Corp. declared a 7% stock dividend on its 10,000 issued and outstanding shares of $3 par value common
stock, which had a fair value of $6 per share before the stock dividend was declared. This stock dividend was
distributed 90 days after the declaration date. By what amount did Griffey’s current liabilities increase as a result
of the stock dividend declaration?
a. $0
b. $700
c. $2,100
 d. $4,200
46. The following information was abstracted from the accounts of the Moore Corp. at year-end: Total income since
incorporation $840,000 Total cash dividends paid 260,000 Fair value of a 20% stock dividend distributed 60,000
Excess of proceeds over cost of treasury stock sold 140,000 What should be the current balance of retained
earnings?
a. $520,000
b. $580,000
c. $610,000
d. $660,000
47. Which one of the following would be excluded from Other Comprehensive Income reported for the current
year?
a. Foreign currency translation adjustments.
b. Foreign currency remeasurement gains or losses.
c. Unrealized holding gains or losses on available-for-sale securities.
d. Additional pension liability in excess of unrecognized prior service cost.
48. Paulson Company uses the percentage-of-completion method to account for long-term construction contracts.
The following information relates to a contract that was awarded at a price of $700,000. The estimated costs
were $500,000, and the contract duration was three years. Year 1 Year 2 Year 3 Cumulative cost to date
$300,000 $390,000 $530,000 Costs to complete at year end 250,000 130,000 0 Progress billings 325,000 220,000
155,000 Collections on account 300,000 200,000 200,000 Assuming that $65,000 was recognized as gross profit
in Year 1, the amount of gross profit Paulson recognized in Year 2 was
a. $49,950
b. $70,000
c. $124,950
d. $135,000

Carefree Construction recognizes construction revenue and expenses using the percentage of completion
method. During 20X0, Carefree began a single, long-term project for a contract price of $1,500,000, which
continued through 20X3. Information on the project follows:

Costs incurred Estimated costs to complete

20X0 $ 400,000 $800,000
20X1 600,000 700,000
20X2 1,350,000 200,000
20X3 1,550,000 0

49. For the year 20X0, what is the amount Carefree should recognize as gross profit from this project?
a. $0
b. $75,000
c. $100,000
d. $375,000
50. For the year 20X1, what is the amount Carefree should recognize as gross profit from this project?
a. $7,692 loss
b. $33,000 loss
c. $0
d. $92,308
51. For the year 20X2, what is the amount Carefree should recognize as gross profit from this project?
a. $142,308 loss
b. $92,308 loss
 c. $50,000 loss
d. $0

Rose Construction Company had the following year-end data on a long-term construction contract started in
20X2 with a contract price of $100,000.
20X2 20X3
Construction cost $30,000 $40,000
Estimated completion costs 50,000 0
Selling, general and administrative expenses 10,000 10,000

52. What is the amount of revenue that will be reported in 20X3 using the percentage-of-completion method?
a. $37,500
b. $40,000
c. $50,000
d. $62,500

Strategic Planning

53. Which of the following is not a significant reason for planning in an organization?
a. Promoting coordination among operating units.
b. Forcing managers to consider expected future trends and conditions.
c. Developing a basis for controlling operations.
d. Enabling selection of personnel for open positions.
54. Certain phases of the planning process should be formalized for all of the following reasons except:
a. Informal plans and goals lack the necessary precision, understanding, and consistency.
b. Formal plans can act as a constraint on the decision-making freedom of managers and supervisors.
c. Formalization requires the establishment and observance of deadlines for decision-making and
planning.
d. Formalization provides a logical basis for rational flexibility and planning.
55. “Strategy” is a broad term that usually means the selection of overall objectives. Strategic analysis ordinarily
excludes the:
a. Trends that will affect the entity’s markets.
b. Target production mix and schedule to be maintained during the year.
c. Forms of organization structure that would best serve the entity.
d. Best ways to invest in research, design, production, distribution, marketing, and administrative
activities.
56. Which one of the following management considerations is usually addressed first in strategic planning?
a. Outsourcing.
b. Overall objectives of the firm.
c. Organization structure.
d. Recent annual budgets.
57. Which of the following should not be included in a company’s internal analysis process?
a. Issues relating to creating value for the company’s customers.
b. Understanding the company’s capacity for innovation.
c. Evaluation of environmental issues that may affect the company’s profitability.
d. Weak areas within the internal organization that should be improved.
58. Contingency planning is a process that companies undertake to:
a. Make certain that their capacity will be able to meet the expected demand as well as decide how to
obtain this capacity.
 b. Determine how to obtain the necessary financing for the future.
c. Understand how customer expectations have changed.
d. Prepare for future, external events.

Budgeting Concepts

59. A company is preparing the sales budget for two potential products. Both products require the use of the same
manufacturing equipment, which is only available for 60 hours each month. The contribution margin of product
A is $95 per unit and the contribution margin of product B is $55 per unit. Product A requires 4 hours of machine
time per unit and product B requires 2.5 hours per unit. In order to efficiently allocate the equipment resources,
the company should manufacture
a. product A, because the contribution margin is more per unit than product B.
b. product B, because they can produce more units of that product than product A.
c. product A, because it will make better use of the equipment than product B.
d. product B, because it will make better use of the equipment than product A.