Part 2 Newly Released Questions Mgt Accting Reporting

CMA Exam Retired Questions

CMA PROGRAM Examination Questions for Practice Part 2

Management Accounting and Reporting Page 1 © 2008 Institute of Certified Management Accountants


Introduction The Institute of Certified Management Accountants (ICMA) is publishing this book of practice questions with answers to help you prepare for the CMA examination. These questions are actual “retired” questions from the computer-based CMA exams and are intended to supplement other study materials. These practice questions will help you test your understanding of the concepts and rules included in your CMA study materials by requiring you to apply those concepts and rules to unique and varying situations. You will encounter different scenarios and applications on your actual examination so it is essential that you understand the underlying concepts. In general, it will not be helpful to you to memorize particular questions. The majority of the topic areas covered on the CMA examination are represented in the practice questions; however, there are some topic areas in the current exam that were not covered in previous versions of the CMA examination (e.g., Strategic Marketing) and therefore, there are no “retired” questions available for release at present. No inference should be made from the lack of practice questions in certain topic areas or the quantity of questions in any particular area. All topic areas listed in the Content Specification will be tested on the CMA examination in the proportions and difficulty levels shown. The CMA Program is a rigorous test of your skills and capabilities and requires dedication to be successful. We hope that these practice questions will be a valuable resource as you pursue your goal of certification. Good luck!

Page 2 © 2008 Institute of Certified Management Accountants


Table of Contents

Section A: Budget Preparation

4

Section B: Cost Management

32

Section C: Information Management

65

Section D: Performance Measurement

74

Section E: External Financial Reporting

98

Answers for Part 2 Practice Questions

156

Other Study Resources

159



CMA Part 2 – Management Accounting and Reporting Examination Questions for Practice Section A: Budget Preparation 1.

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

2.

When compared to static budgets, flexible budgets a. b. c. d.

3.

offer managers a more realistic comparison of budget and actual fixed cost items under their control. provide a better understanding of the capacity variances during the period being evaluated. encourage managers to use less fixed costs items and more variable cost items that are under their control. offer managers a more realistic comparison of budget and actual revenue and cost items under their control.

All of the following are criticisms of the traditional budgeting process except that it a. b. c. d.

4.

force management planning. provide performance criteria. promote communication and coordination within the organization. limit unauthorized expenditures.

makes across-the-board cuts when early budget iterations show that planned expenses are too high. incorporates non-financial measures as well as financial measures into its output. overemphasizes a fixed time horizon such as one year. is not used until the end of the budget period to evaluate performance.

Rainbow Inc. recently appointed Margaret Joyce as vice president of finance and asked her to design a new budgeting system. Joyce has changed to a monthly budgeting system by dividing the company’s annual budget by twelve. Joyce then prepared monthly budgets for each department and asked the managers to submit monthly reports comparing actual to budget. A sample monthly report for Department A is shown below.


CMA Exam Retired Questions Rainbow Inc. Monthly Report for Department A Units Variable production costs Direct material Direct labor Variable factory overhead Fixed costs Depreciation Taxes Insurance Administration Marketing Total costs

Actual 1,000

Budget 900

Variance 100F

$2,800 4,800 4,250

$2,700 4,500 4,050

$100U 300U 200U

3,000 1,000 1,500 1,100 1,000 $19,450

2,700 900 1,350 990 900 $18,090

300U 100U 150U 110U 100U $1,360U

This monthly budget has been imposed from the top and will create behavior problems. All of the following are causes of such problems except a. b. c. d. 5.

the use of a flexible budget rather than a fixed budget. top management authoritarian attitude toward the budget process. the inclusion of noncontrollable costs such as depreciation. the lack of consideration for factors such as seasonality.

The following sequence of steps are employed by a company to develop its annual profit plan. • Planning guidelines are disseminated downward by top management after receiving input from all levels of management. • A sales budget is prepared by individual sales units reflecting the sales targets of the various segments. This provides the basis for departmental production budgets and other related components by the various operating units. Communication is primarily lateral with some upward communication possible. • A profit plan is submitted to top management for coordination and review. Top management's recommendations and revisions are acted upon by middle management. A revised profit plan is resubmitted for further review to top management. • Top management grants final approval and distributes the formal plan downward to the various operating units. This outline of steps best describes which one of the following approaches to budget development? a. b. c. d.

Imposed budgeting by top management. Bottom-up approach. Top-down approach. Total justification of all activities by operating units. Page 5 © 2008 Institute of Certified Management Accountants


6.

All of the following are advantages of top-down budgeting as opposed to participatory budgeting, except that it a. b. c. d.

7.

In developing the budget for the next year, which one of the following approaches would produce the greatest amount of positive motivation and goal congruence? a. b. c. d.

8.

Permit the divisional manager to develop the goal for the division that in the manager’s view will generate the greatest amount of profits. Have senior management develop the overall goals and permit the divisional manager to determine how these goals will be met. Have the divisional and senior management jointly develop goals and objectives while constructing the corporation’s overall plan of operation. Have the divisional and senior management jointly develop goals and the divisional manager develop the implementation plan.

Which one of the following is not an advantage of a participatory budgeting process? a. b. c. d.

9.

increases coordination of divisional objectives. reduces the time required for budgeting. may limit the acceptance of proposed goals and objectives. facilitates implementation of strategic plans.

Coordination between departments. Communication between departments. Goal congruence. Control of uncertainties.

In developing the budget for the next year, which one of the following approaches would produce the greatest amount of positive motivation and goal congruence? a. b. c. d.

Permit the divisional manager to develop the goal for the division that in the manager’s view will generate the greatest amount of profits. Have senior management develop the overall goals and permit the divisional manager to determine how these goals will be met. Have the divisional and senior management jointly develop goals and objectives while constructing the corporation’s overall plan of operation. Have the divisional and senior management jointly develop goals and the divisional manager develop the implementation plan.


CMA Exam Retired Questions 10.

Which one of the following statements concerning approaches for the budget development process is correct? a. b. c. d.

11.

Rock Industries has four divisions. In the quest to develop a more achievable budget for the coming year, the chief executive officer has elected to develop the company’s budget by using a decentralized bottom-up budget approach. Chip Jones is production manager in one of the divisions. Jones’ involvement in the budget process this year will probably a. b. c. d.

12.

The top-down approach to budgeting will not ensure adherence to strategic organizational goals. To prevent ambiguity, once departmental budgeted goals have been developed, they should remain fixed even if the sales forecast upon which they are based proves to be wrong in the middle of the fiscal year. With the information technology available, the role of budgets as an organizational communication device has declined. Since department managers have the most detailed knowledge about organizational operations, they should use this information as the building blocks of the operating budget.

be negligible. require development of a production budget that is forwarded to the Budget Department. require development of a production budget after receiving the division’s projected sales forecast. require development of a production budget based on the prior year’s manufacturing activity.

Helen Thomas, Amador Corporation’s vice president of planning, has seen and heard it all. She has told the corporate controller that she is “....very upset with the degree of slack that veteran managers use when preparing their budgets.” Thomas has considered implementing some of the following activities during the budgeting process. 1. 2. 3. 4. 5.

Develop the budgets by top management and issue them to lower-level operating units. Study the actual revenues and expenses of previous periods in detail. Have the budgets developed by operating units and accept them as submitted by a company-wide budget committee. Share the budgets with all employees as a means to reach company goals and objectives. Use an iterative budgeting process that has several “rounds” of changes initiated by operating units and/or senior managers. Page 7 © 2008 Institute of Certified Management Accountants

CMA Exam Retired Questions Which one of these activities should Amador implement in order to best remedy Thomas’s concerns, help eliminate the problems experienced by Amador, and motivate personnel? a. b. c. d. 13.

Budgeting problems where departmental managers are repeatedly achieving easy goals or failing to achieve demanding goals can be best minimized by establishing a. b. c. d.

14.

lack of communication and feedback. unity of managerial action in achieving organizational goals. attempt to attain goal congruence. motivation to achieve realistic but challenging goals.

Which one of the following items would most likely cause the planning and budgeting system to fail? The lack of a. b. c. d.

16.

preventive controls. a policy that allows managers to build slack into the budget. participative budgeting where managers pursue objectives consistent with those set by top management. better communication whereby managers discuss budget matters daily with their superiors.

All of the following behaviors are likely to occur under management by objectives (MBO) except the a. b. c. d.

15.

1 only. 2 and 3. 2 and 4. 2, 4, and 5.

historical financial data. input from several levels of management. top management support. adherence to rigid budgets during the year.

All of the following are disadvantages of top-down budgeting as opposed to participatory budgeting, except that it a. b. c. d.

may result in a budget that is not possible to achieve. may limit the acceptance of proposed goals and objectives. reduces the communication between employees and management. reduces the time required for budgeting. Page 8 © 2008 Institute of Certified Management Accountants


Suboptimal decision making is not likely to occur when a. b. c. d.

18.

All of the following statements concerning standard costs are correct except that a. b. c. d.

19.

imposed approach. centralized top-down approach. engineering approach. team development approach.

When compared with ideal standards, practical standards a. b. c. d.

21.

time and motion studies are often used to determine standard costs. standard costs are usually set for one year. standard costs can be used in costing inventory accounts. standard costs are usually stated in total, while budgeted costs are usually stated on a per-unit basis.

One approach for developing standard costs incorporates communication, bargaining, and interaction among product line managers; the immediate supervisors for whom the standards are being developed; and the accountants and engineers before the standards are accepted by top management. This approach would best be characterized as a(n) a. b. c. d.

20.

there is little congruence among the overall organization goals, the subunit goals, and the individual goals of decision makers. goals and standards of performance are set by the top-management. guidance is given to subunit managers about how standards and goals affect them. the subunits in the organization compete with each other for the same input factors or for the same customers.

produce lower per-unit product costs. result in a less desirable basis for the development of budgets. incorporate very generous allowances for spoilage and worker inefficiencies. serve as a better motivating target for manufacturing personnel.

Diana Stinson, Cherry Valley Inc.’s factory manager, had lost her patience. Six months ago, she had appointed a team from the production and service departments to finalize the allocation of costs and setting of standard costs. They were still feuding, and so she had hired Brennan and Rose, a large consulting firm, to resolve the matter. All of the following are potential consequences of having the standards set by Brennan and Rose except that Page 9 © 2008 Institute of Certified Management Accountants

CMA Exam Retired Questions a. b. c. d. 22.

Jura Corporation is developing standards for the next year. Currently XZ-26, one of the material components, is being purchased for $36.45 per unit. It is expected that the component’s cost will increase by approximately 10% next year and the price could range from $38.75 to $44.18 per unit depending on the quantity purchased. The appropriate standard for XZ-26 for next year should be set at the a. b. c. d.

23.

current actual cost plus the forecasted 10% price increase. lowest purchase price in the anticipated range to keep pressure on purchasing to always buy in the lowest price range. highest price in the anticipated range to insure that there are only favorable purchase price variances. price agreed upon by the purchasing manager and the appropriate level of company management.

Which one of the following will allow a better use of standard costs and variance analysis to help improve managerial decision-making? a. b. c. d.

24.

Brennan and Rose may not fully understand Cherry Valley’s manufacturing process, resulting in suboptimal performance. employees could react negatively since they did not participate in setting the standards. there could be dissatisfaction if the standards contain costs which are not controllable by the unit held responsible. the standards may appear to lack management support.

Company A does not differentiate between variable and fixed overhead in calculating its overhead variances. Company B uses the prior year’s average actual cost as the current year’s standard. Company C investigates only negative variances. Company D constantly revises standards to reflect learning curves.

After performing a thorough study of Michigan Company’s operations, an independent consultant determined that the firm’s labor standards were probably too tight. Which one of the following facts would be inconsistent with the consultant’s conclusion? a. b. c. d.

A review of performance reports revealed the presence of many unfavorable efficiency variances. Michigan’s budgeting process was well-defined and based on a bottom-up philosophy. Management noted that minimal incentive bonuses have been paid in recent periods. Production supervisors found several significant fluctuations in manufacturing volume, with short-term increases on output being followed by rapid, sustained declines. Page 10 © 2008 Institute of Certified Management Accountants


25.

All of the following are examples of benchmarking standards except a. b. c. d.

26.

Country Ovens is a family restaurant chain. Due to an unexpected road construction project, traffic passing by the Country Ovens restaurant in Newtown has significantly increased. As a result, restaurant volume has similarly increased well beyond the level expected. Which type of budget would be most appropriate in helping the restaurant manager plan for restaurant labor costs? a. b. c. d.

27.

Zero-based budget. Rolling budget. Activity-based budget. Flexible budget.

Pavilion Inc. has implemented a budget process that begins with the analysis of current practices to find improvements and determine changes needed to attain improvements. Then budgets are based on the improved practices or procedures resulting in budget figures that are lower than the previous period. The firm expects to be able to manufacture its product or render its service at a lower cost. The decrease in the budget amounts are the consequence of doing the same activity more efficiently and with higher quality and is not the result of arbitrary cuts. The budget process described is referred to as a. b. c. d.

28.

the performance of the unit during the previous year. the best performance of the unit in comparable past periods. a comparison with a similar unit within the same company. the best performance of a competitor with a similar operation.

activity-based budgeting. kaizen budgeting. standard cost budgeting. zero-based budgeting.

A budgeting approach that requires a manager to justify the entire budget for each budget period is known as a. b. c. d.

performance budgeting. program budgeting. zero-base budgeting. incremental budgeting.



29.

Kaizen budgeting is a budgeting approach that a. b. c. d.

30.

The type of budget system that projects costs based on future improvements rather than current practices and methods is called a. b. c. d.

31.

zero-based budgeting. Kaizen budgeting. flexible budgeting. activity-based budgeting.

Many companies use comprehensive budgeting in planning for the next year’s activities. When both an operating budget and a financial budget are prepared, which one of the following is correct concerning the financial budget?

a. b. c. d. 32.

focuses on the costs of activities necessary to produce and sell products and services. adjusts costs to the actual level of output achieved or expected to be achieved during the budget period. projects costs on the basis of future improvements rather than current practices and methods. projects expenses from the ground up, as though the budget were being prepared for the first time.

Capital Budget Yes No Yes No

Included in the Financial Budget Pro-forma Balance Sheet Cash Budget No Yes. Yes No. Yes Yes. No No.

What would be the correct chronological order of preparation for the following budgets? I. II. III. IV. a. b. c. d.

Cost of goods sold budget. Production budget. Purchases budget. Administrative budget.

I, II, III, IV. III, II, IV, I. IV, II, III, I. II, III, I, IV. Page 12 © 2008 Institute of Certified Management Accountants


33.

Lexcore Manufacturing is currently in the process of preparing its quarterly budgets for the upcoming year. Laborers historically take 3.2 hours to complete an intricate assembly task. Which one of the following most correctly shows how the assembly time should be progressively estimated throughout the year if Lexcore employs continuous (rolling) budgets or Kaizen budgets? a. b. c. d.

34.

Production budget, direct material budget, revenue budget. Production budget, revenue budget, direct material budget. Revenue budget, production budget, direct material budget. Revenue budget, direct material budget, production budget.

Stumphouse Cheese is in the process of implementing a cost improvement system with kaizen costing as the basis for budgeting all manufacturing activities. This will be utilized over the next four years in an attempt to become more profitable. The target reduction rate has been set at 5% of fixed overhead costs. Total fixed overhead costs for this year were $900,000. What is the budgeted amount for the next two years using kaizen costing? a. b. c. d.

36.

Kaizen Budgets Hold constant at 3.2. Decrease to less than 3.2. Hold constant at 3.2. Decrease to less than 3.2.

Which one of the following best describes the order in which budgets should be prepared when developing the annual master operating budget? a. b. c. d.

35.

Continuous (Rolling) Budgets Hold constant at 3.2 Hold constant at 3.2 Decrease to less than 3.2 Decrease to less than 3.2

Current Year +1 $855,000 $855,000 $855,000 $900,000

Current Year +2 Unable to determine. $812,250. $810,000. $855,000.

Netco’s sales budget for the coming year is as follows. Item 1 2 3

Volume in Units Sales Price 200,000 $50 150,000 10 300,000 30 Total sales revenue


Sales Revenue $10,000,000 1,500,000 9,000,000 $20,500,000

CMA Exam Retired Questions Items 1 and 3 are different models of the same product. Item 2 is a complement to Item 1. Past experience indicates that the sales volume of Item 2 relative to the sales volume of Item 1 is fairly constant. Netco is considering an 10% price increase for the coming year for Item 1, which will cause sales of Item 1 to decline by 20%, while simultaneously causing sales of Item 3 to increase by 5%. If Netco institutes the price increase for Item 1, total sales revenue will decrease by a. b. c. d. 37.

$1,050,000. $850,000. $750,000. $550,000.

Troughton Company manufactures radio-controlled toy dogs. Summary budget financial data for Troughton for the current year are as follows. Sales (5,000 units at $150 each) Variable manufacturing cost Fixed manufacturing cost Variable selling and administrative cost Fixed selling and administrative cost

$750,000 400,000 100,000 80,000 150,000

Troughton uses an absorption costing system with overhead applied based on the number of units produced, with a denominator level of activity of 5,000 units. Underapplied or overapplied manufacturing overhead is written off to cost of goods sold in the year incurred. The $20,000 budgeted operating income from producing and selling 5,000 toy dogs planned for this year is of concern to Trudy George, Troughton’s president. She believes she could increase operating income to $50,000 (her bonus threshold) if Troughton produces more units than it sells, thus building up the finished goods inventory. How much of an increase in the number of units in the finished goods inventory would be needed to generate the $50,000 budgeted operating income? a. b. c. d. 38.

556 units. 600 units. 1,500 units. 7,500 units.

Ace Manufacturing plans to produce two products, Product C and Product F, during the next year, with the following characteristics. Selling price per unit Variable cost per unit Expected sales (units)

Product C $10 $ 8 20,000

Product F $15 $10 5,000


CMA Exam Retired Questions Total projected fixed costs for the company are $30,000. Assume that the product mix would be the same at the breakeven point as at the expected level of sales of both products. What is the projected number of units (rounded) of Product C to be sold at the breakeven point? a. b. c. d. 39.

Hannon Retailing Company prices its products by adding 30% to its cost. Hannon anticipates sales of $715,000 in July, $728,000 in August, and $624,000 in September. Hannon’s policy is to have on hand enough inventory at the end of the month to cover 25% of the next month’s sales. What will be the cost of the inventory that Hannon should budget for purchase in August? a. b. c. d.

40.

$509,600. $540,000. $560,000. $680,000.

Streeter Company produces plastic microwave turntables. Sales for the next year are expected to be 65,000 units in the first quarter, 72,000 units in the second quarter, 84,000 units in the third quarter, and 66,000 units in the fourth quarter. Streeter maintains a finished goods inventory at the end of each quarter equal to one half of the units expected to be sold in the next quarter. How many units should Streeter produce in the second quarter? a. b. c. d.

41.

2,308 units. 9,231 units. 11,538 units. 15,000 units.


Tyler Company produces one product and budgeted 220,000 units for the month of August with the following budgeted manufacturing costs. Variable costs Batch set-up cost Fixed costs Total

Total Costs $1,408,000 880,000 1,210,000 $3,498,000

Cost Per Unit $ 6.40 4.00 5.50 $15.90


CMA Exam Retired Questions The variable cost per unit and the total fixed costs are unchanged within a production range of 200,000 to 300,000 units per month. The total for the batch set-up cost in any month depends on the number of production batches that Tyler runs. A normal batch consists 50,000 units unless production requires less volume. In the prior year, Tyler experienced a mixture of monthly batch sizes of 42,000 units, 45,000 units, and 50,000 units. Tyler consistently plans production each month in order to minimize the number of batches. For the month of September, Tyler plans to manufacture 260,000 units. What will be Tyler’s total budgeted production costs for September? a. b. c. d. 42.

Ming Company has budgeted sales at 6,300 units for the next fiscal year, and desires to have 590 good units on hand at the end of that year. Beginning inventory is 470 units. Ming has found from past experience that 10% of all units produced do not pass final inspection, and must therefore be destroyed. How many units should Ming plan to produce in the next fiscal year? a. b. c. d.

43.

6,890. 7,062. 7,133. 7,186.

Savior Corporation assembles backup tape drive systems for home microcomputers. For the first quarter, the budget for sales is 67,500 units. Savior will finish the fourth quarter of last year with an inventory of 3,500 units, of which 200 are obsolete. The target ending inventory is 10 days of sales (based upon 360 days). What is the budgeted production for the first quarter? a. b. c. d.

44.

$3,754,000. $3,930,000. $3,974,000. $4,134,000.

75,000. 71,700. 71,500. 64,350.}

Streeter Company produces plastic microwave turntables. Sales for the next year are expected to be 65,000 units in the first quarter, 72,000 units in the second quarter, 84,000 units in the third quarter, and 66,000 units in the fourth quarter. Streeter usually maintains a finished goods inventory at the end of each quarter equal to one half of the units expected to be sold in the next quarter. However, due to a work stoppage, the finished goods inventory at the end of the first quarter is 8,000 units less than it should be. How many units should Streeter produce in the second quarter? Page 16 © 2008 Institute of Certified Management Accountants



Data regarding Rombus Company's budget are shown below. Planned sales Material cost Direct labor Direct labor rate Finished goods beginning inventory Finished goods ending inventory Direct materials beginning inventory Direct materials ending inventory Materials used per unit

4,000 units $2.50 per pound 3 hours per unit $7 per hour 900 units 600 units 4,300 units 4,500 units 6 pounds

Rombus Company's production budget will show total units to be produced of a. b. c. d. 46.

3,700. 4,000. 4,300. 4,600.

Krouse Company is in the process of developing its operating budget for the coming year. Given below are selected data regarding the company’s two products, laminated putter heads and forged putter heads, that are sold through specialty golf shops. Putter Heads Forged Laminated Raw materials Steel 2 pounds @ $5/lb. Copper None Direct labor 1/4 hour @ $20/hr. Expected sales (units) 8,200 Selling price per unit $30 Ending inventory target (units) 100 Beginning inventory (units) 300 Beginning inventory (cost) $5,250

1 pound @ $5/lb. 1 pound @ $15/lb. 1 hour @ $22/hr. 2,000 $80 60 60 $3,120

Manufacturing overhead is applied to units produced on the basis of direct labor hours. Variable manufacturing overhead is projected to be $25,000, and fixed manufacturing overhead is expected to be $15,000. The estimated cost to produce one unit of the laminated putter head is Page 17 © 2008 Institute of Certified Management Accountants


a. b. c. d. 47.

$42. $46. $52. $62.

Tidwell Corporation sells a single product for $20 per unit. All sales are on account, with 60% collected in the month of sale and 40% collected in the following month. A partial schedule of cash collections for January through March of the coming year reveals the following receipts for the period.

December receivables From January sales From February sales

Cash Receipts January February March $32,000 54,000 $36,000 66,000 $44,000

Other information includes the following. • •

Inventories are maintained at 30% of the following month’s sales. Assume that March sales total $150,000.

The number of units to be purchased in February is a. b. c. d. 48.


Stevens Company manufactures electronic components used in automobile manufacturing. Each component uses two raw materials, Geo and Clio. Standard usage of the two materials required to produce one finished electronic component, as well as the current inventory, are shown below. Material Geo Clio

Standard Per Unit 2.0 pounds 1.5 pounds

Price $15/lb. $10/lb.

Current Inventory 5,000 pounds 7,500 pounds

Stevens forecasts sales of 20,000 components for the next two production periods. Company policy dictates that 25% of the raw materials needed to produce the next period’s projected sales be maintained in ending direct materials inventory. Based on this information, the budgeted direct material purchases for the coming period would be Page 18 © 2008 Institute of Certified Management Accountants


a. b. c. d. 49.

Geo $450,000 $675,000 $675,000 $825,000

Clio $450,000. $300,000. $400,000. $450,000.

Petersons Planters Inc. budgeted the following amounts for the coming year. Beginning inventory, finished goods $ 10,000 Cost of goods sold 400,000 Direct material used in production 100,000 Ending inventory, finished goods 25,000 Beginning and ending work-in-process inventory Zero Overhead is estimated to be two times the amount of direct labor dollars. The amount that should be budgeted for direct labor for the coming year is a. b. c. d.

50.

$315,000. $210,000. $157,500. $105,000.

Over the past several years, McFadden Industries has experienced the following regarding the company’s shipping expenses. Fixed costs Average shipment Cost per pound

$16,000 15 pounds $.50

Shown below are McFadden’s budget data for the coming year. Number of units shipped 8,000 Number of sales orders 800 Number of shipments 800 Total sales $1,200,000 Total pounds shipped 9,600 McFadden’s expected shipping costs for the coming year are a. b. c. d.

$4,800. $16,000. $20,000. $20,800. Page 19 © 2008 Institute of Certified Management Accountants


Swan Company is a maker of men's slacks. The company would like to maintain 20,000 yards of fabric in ending inventory. The beginning fabric inventory is expected to contain 25,000 yards. The expected yards of fabric needed for sales is 90,000. Compute the yards of fabric that Swan needs to purchase. a. b. c. d.

52.

85,000. 90,000. 95,000. 135,000.

Manoli Gift Shop maintains a 35% gross profit percentage on sales, and carries an ending inventory balance each month sufficient to support 30% of the next month’s expected sales. Anticipated sales for the fourth quarter are as follows. October November December

$42,000 58,000 74,000

What amount of goods should Manoli Gift Shop plan to purchase during the month of November? a. b. c. d. 53.

$40,820. $51,220. $52,130. $62,800.

In preparing the direct material purchases budget for next quarter, the plant controller has the following information available. Budgeted unit sales Pounds of materials per unit Cost of materials per pound Pounds of materials on hand Finished units on hand Target ending units inventory Target ending inventory of pounds of materials How many pounds of materials must be purchased? a. b. c. d.

2,475. 7,900. 8,700. 9,300. Page 20 © 2008 Institute of Certified Management Accountants

2,000 4 $3 400 250 325 800


Playtime Toys estimates that it will sell 200,000 dolls during the coming year. The beginning inventory is 12,000 dolls; the target ending inventory is 15,000 dolls. Each doll requires two shoes which are purchased from an outside supplier. The beginning inventory of shoes is 20,000; the target ending inventory is 18,000 shoes. The number of shoes that should be purchased during the year is a. b. c. d.

55.

396,000 shoes. 398,000 shoes. 402,000 shoes. 404,000 shoes.

Maker Distributors has a policy of maintaining inventory at 15% of the next month’s forecasted sales. The cost of Maker’s merchandise averages 60% of the selling price. The inventory balance as of May 31 is $63,000, and the forecasted dollar sales for the last seven months of the year are as follows. June $700,000 July 600,000 August 650,000 September 800,000 October 850,000 November 900,000 December 840,000 What is the budgeted dollar amount of Maker’s purchases for July? a. b. c. d.

56.

$355,500. $360,000. $364,500. $399,000.

The pro forma statement of employee benefit costs, a budget schedule that is prepared as part of an organization's annual profit plan, would include costs related to a. b. c. d.

employees' gross wages and salaries and the related company-paid benefits. employees' net wages and salaries and the related company-paid benefits. all payroll related deductions withheld from employees and company-paid benefits. company-paid benefits and company-paid payroll taxes.



A company that manufactures furniture is establishing its budget for the upcoming year. All of the following items would appear in its overhead budget except for the a. b. c. d.

58.

overtime paid to the workers who perform production scheduling. cost of glue used to secure the attachment of the legs to the tables. fringe benefits paid to the production supervisor. freight charges paid for the delivery of raw materials to the company.

Using the following budget data for Valley Corporation, which produces only one product, calculate the company’s predetermined factory overhead application rate for variable overhead. Units to be produced Units to be sold Indirect materials, varying with production Indirect labor, varying with production Factory supervisor’s salary, incurred regardless of production Depreciation on factory building and equipment Utilities to operate factory machines Security lighting for factory Selling, general and administrative expenses a. b. c. d.

59.

20,000 30,000 12,000 2,000 5,000

$2.09. $2.30. $4.73. $5.20.

All of the following would appear on a projected schedule of cost of goods manufactured except for a. b. c. d.

60.

11,000 10,000 $ 1,000 10,000

ending work-in-process inventory. beginning finished goods inventory. the cost of raw materials used. applied manufacturing overhead.

Given the following data for Scurry Company, what is the cost of goods sold? Beginning inventory of finished goods Cost of goods manufactured Ending inventory of finished goods Beginning work-in-process inventory Ending work-in-process inventory

$100,000 700,000 200,000 300,000 50,000



a. b. c. d. 61.

$500,000. $600,000. $800,000. $950,000.

Tut Company’s selling and administrative costs for the month of August, when it sold 20,000 units, were as follows. Costs Variable costs Step costs Fixed costs Total selling and administrative costs

Per Unit $18.60 4.25 8.80

Total $372,000 85,000 176,000

$31.65

$633,000

The variable costs represent sales commissions paid at the rate of 6.2% of sales. The step costs depend on the number of salespersons employed by the company. In August there were 17 persons on the sales force. However, two members have taken early retirement effective August 31. It is anticipated that these positions will remain vacant for several months. Total fixed costs are unchanged within a relevant range of 15,000 to 30,000 units per month. Tut is planning a sales price cut of 10%, which it expects will increase sales volume to 24,000 units per month. If Tut implements the sales price reduction, the total budgeted selling and administrative costs for the month of September would be a. b. c. d. 62.

$652,760. $679,760. $714,960. $759,600.

Granite Company sells products exclusively on account, and has experienced the following collection pattern: 60% in the month of sale, 25% in the month after sale, and 15% in the second month after sale. Uncollectible accounts are negligible. Customers who pay in the month of sale are given a 2% discount. If sales are $220,000 in January, $200,000 in February, $280,000 in March, and $260,000 in April, Granite’s accounts receivable balance on May 1 will be a. b. c. d.

$107,120. $143,920. $146,000. $204,000.



63.

The controller of Nottingham Stores has asked a staff accountant to prepare detailed reports that summarize the firm’s cash flows for the upcoming accounting period and cash position at the end of the period. Accordingly, the controller has requested preparation of a cash budget, a pro-forma statement of cash flows, a detailed listing of cash collections from customers, and a detailed listing of cash payments for merchandise purchases. Which one of the following correctly identifies the first and last document to be prepared by the accountant?

64.

a. b. c.

First Document Listing of cash collections Listing of cash collections Cash budget

d.

Listing of cash payments

Myers Company uses a calendar-year and prepares a cash budget for each month of the year. Which one of the following items should be considered when developing July’s cash budget? a. b. c. d.

65.

Last Document Pro-forma statement of cash flows. Cash budget. Either the listing of cash collections or listing of cash payments, the order of which is unimportant. Either the pro-forma statement of cash flows or the cash budget, the order of which is unimportant.

Federal income tax and social security tax withheld from employee’s June paychecks to be remitted to the Internal Revenue Service in July. Quarterly cash dividends scheduled to be declared on July 15 and paid on August 6 to shareholders of record as of July 25. Property taxes levied in the last calendar year scheduled to be paid quarterly in the coming year during the last month of each calendar quarter. Recognition that 0.5% of the July sales on account will be uncollectible.

Brown Company estimates that monthly sales will be as follows. January February March

$100,000 150,000 180,000

Historical trends indicate that 40% of sales are collected during the month of sale, 50% are collected in the month following the sale, and 10% are collected two months after the sale. Brown’s accounts receivable balance as of December 31 totals $80,000 ($72,000 from December’s sales and $8,000 from November’s sales). The amount of cash Brown can expect to collect during the month of January is Page 24 © 2008 Institute of Certified Management Accountants


$76,800. $84,000. $108,000. $133,000.

Cooper Company’s management team is preparing a cash budget for the coming quarter. The following budgeted information is under review. Revenue Inventory purchases Other expenses

January $700,000 350,000 150,000

February $800,000 425,000 175,000

March $500,000 225,000 175,000

The company expects to collect 40% of its monthly sales in the month of sale and 60% in the following month. 50% of inventory purchases are paid in the month of purchase, and the other 50% in the following month. All payments for other expenses are made in the month incurred. Cooper forecasts the following account balances at the beginning of the quarter. Cash Accounts receivable Accounts payable (Inventory)

$100,000 300,000 500,000

Given the above information, the projected change in cash during the coming quarter will be a. b. c. d. 67.

$412,500. $300,000. $112,500. $ -0-.

Bootstrap Corporation anticipates the following sales during the last six months of the year. July August September October November December

$460,000 500,000 525,000 500,000 480,000 450,000

20% of Bootstrap’s sales are for cash. The balance is subject to the collection pattern shown below. Page 25 © 2008 Institute of Certified Management Accountants


Percentage of balance collected in the month of sale 40% Percentage of balance collected in the month following sale 30% Percentage of balance collected in the second month following sale 25% Percentage of balance uncollectible 5% What is the planned net accounts receivable balance as of December 31? a. b. c. d. 68.

$279,300. $294,000. $360,000. $367,500.

Projected monthly sales of Wallstead Corporation for January, February, March, and April are as follows. January February March April • • •

$300,000 340,000 370,000 390,000

The company bills each month's sales on the last day of the month. Receivables are booked gross and credit terms of sale are: 2/10, n/30. 50% of the billings are collected within the discount period, 30% are collected by the end of the month, 15% are collected by the end of the second month, and 5% become uncollectible.

Budgeted cash collections for Wallstead Company during April would be a. b. c. d. 69.

$343,300. $347,000. $349,300. $353,000.

Tip-Top Cleaning Supply carries a large number of different items in its inventory, giving the firm a competitive advantage in its industry. Below is part of Tip-Top’s budget for the first quarter of next year. Sales Cost of goods sold Rent and salary expenses

$855,000 425,000 375,000 Page 26

© 2008 Institute of Certified Management Accountants

CMA Exam Retired Questions Historically, all of the sales are on account and are made evenly over the quarter. 5% of all sales are determined to be uncollectible and written off. The balance of the receivables is collected in 50 days. This sales and collection experience is expected to continue in the first quarter. The projected balance sheet for the first day of the quarter includes the following account balances. Cash Accounts receivable (net) Inventory Accounts payable

$ 10,000 450,000 900,000 800,000

How much cash can Tip-Top anticipate collecting in the first quarter (based on a 360-day year)? a. b. c. d. 70.

$811,000. $830,000. $901,250. $902,500.

Monroe Products is preparing a cash forecast based on the following information. • • • •

Monthly sales: December $200,000; January $200,000; February $350,000; March $400,000. All sales are on credit and collected the month following the sale. Purchases are 60% of next month’s sales and are paid for in the month of purchase. Other monthly expenses are $25,000, including $5,000 of depreciation.

If the January beginning cash balance is $30,000, and Monroe is required to maintain a minimum cash balance of $10,000, how much short-term borrowing will be required at the end of February? a. b. c. d. 71.

$60,000. $70,000. $75,000. $80,000.

All of the following would appear on a projected schedule of cost of goods manufactured except for a. b. c. d.

ending work-in-process inventory. beginning finished goods inventory. the cost of raw materials used. applied manufacturing overhead. Page 27 © 2008 Institute of Certified Management Accountants


Prudent Corporation’s budget for the upcoming accounting period reveals total sales of $700,000 in April and $750,000 in May. The sales cash collection pattern is 20% of each month’s sales are cash sales. 5% of a month’s credit sales are uncollectible. 70% of a month’s credit sales are collected in the month of sale. 25% of a month’s credit sales are collected in the month following the sale. If Prudent anticipates the cash sale of a piece of old equipment in May for $25,000, May’s total budgeted cash receipts would be a. b. c. d.

73.

$560,000. $702,500. $735,000. $737,500.

ANNCO sells products on account, and experiences the following collection schedule. In the month of sale In the month after sale In the second month after sale

10% 60% 30%

At December 31, ANNCO reports accounts receivable of $211,500. Of that amount, $162,000 is due from December sales, and $49,500 from November sales. ANNCO is budgeting $170,000 of sales for January. If so, what amount of cash should be collected in January? a. b. c. d. 74.

$129,050. $174,500. $211,500. $228,500.

Brooke Company’s management team is preparing a cash budget for the coming quarter. The following budgeted information is under review. Revenue Inventory purchases Other expenses

January $700,000 350,000 150,000

February $800,000 425,000 175,000

March $500,000 225,000 175,000

The company expects to collect 40% of its monthly sales in the month of sale and 60% in the following month. 50% of inventory purchases are paid in the month of purchase, and Page 28 © 2008 Institute of Certified Management Accountants

CMA Exam Retired Questions 50% in the following month. Payments for all other expenses are made in the month incurred. Brooke forecasts the following account balances at the beginning of the quarter. Cash Accounts receivable Accounts payable (Inventory)

$200,000 300,000 400,000

Given the above information, the projected ending cash balance for February will be a. b. c. d. 75.

$712,500. $500,000. $232,500. $120,000.

Health Foods Inc. has decided to start a cash budgeting program to improve overall cash management. Information gathered from the past year reveals the following cash collection trends. 40% of sales are on credit 50% of credit sales are collected in month of sale 30% of credit sales are collected first month after sale 15% of credit sales are collected second month after sale 5% of credit sales result in bad debts Gross sales for the last five months were as follows. January February March April May

$220,000 240,000 250,000 230,000 260,000

Sales for June are projected to be $255,000. Based on this information, the expected cash receipts for March would be a. b. c. d.

$230,000. $237,400. $242,000. $243,200.



Tidwell Corporation sells a single product for $20 per unit. All sales are on account, with 60% collected in the month of sale and 40% collected in the following month. A schedule of cash collections for January through March of the coming year reveals the following receipts for the period. Cash Receipts January February March $32,000 54,000 $36,000 66,000 $44,000 72,000

December receivables From January sales From February sales From March sales Other information includes the following. • •

•

Inventories are maintained at 30% of the following month’s sales. Tidwell desires to keep a minimum cash balance of $15,000. Total payments in January are expected to be $106,500, which excludes $12,000 of depreciation expense. Any required borrowings are in multiples of $1,000. The December 31 balance sheet for the preceding year revealed a cash balance of $24,900.

Ignoring income taxes, the financing needed in January to maintain the firm’s minimum cash balance is a. b. c. d. 77.

$8,000. $10,600. $11,000. $23,000.

Data regarding Johnsen Inc.’s forecasted dollar sales for the last seven months of the year and Johnsen’s projected collection patterns are as follows. Forecasted sales June $700,000 July 600,000 August 650,000 September 800,000 October 850,000 November 900,000 December 840,000


CMA Exam Retired Questions Types of sales Cash sales Credit sales

30% 70%

Collection pattern on credit sales (5% determined to be uncollectible) During the month of sale 20% During the first month following the sale 50% During the second month following the sale 25% Johnsen’s budgeted cash receipts from sales and collections on account for September are a. b. c. d. 78.

$635,000. $684,500. $807,000. $827,000.

The Mountain Mule Glove Company is in its first year of business. Mountain Mule had a beginning cash balance of $85,000 for the quarter. The company has a $50,000 shortterm line of credit. The budgeted information for the first quarter is shown below. January February March Sales $60,000 $40,000 $50,000 Purchases 35,000 40,000 75,000 Operating costs 25,000 25,000 25,000 All sales are made on credit and are collected in the second month following the sale. Purchases are paid in the month following the purchase, while operating costs are paid in the month that they are incurred. How much will Mountain Mule need to borrow at the end of the quarter if the company needs to maintain a minimum cash balance of $5,000 as required by a loan covenant agreement? a. b. c. d.

$0. $5,000. $10,000. $45,000.


CMA Exam Retired Questions Section B: Cost Management 79.

In practice, items such as wood screws and glue used in the production of school desks and chairs would most likely be classified as a. b. c. d.

80.

direct labor. factory overhead. direct materials. period costs.

Kimber Company has the following unit cost for the current year. Raw material Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total unit cost

$20.00 25.00 10.00 15.00 $70.00

Fixed manufacturing cost is based on an annual activity level of 8,000 units. Based on these data, the total manufacturing cost expected to be incurred to manufacture 9,000 units in the current year is a. b. c. d. 81.

$560,000. $575,000. $615,000. $630,000.

A review of Plunkett Corporation’s accounting records for last year disclosed the following selected information. Variable costs Direct materials used Direct labor Manufacturing overhead Selling costs

$ 56,000 179,100 154,000 108,400

Fixed costs Manufacturing overhead Selling costs Administrative costs

267,000 121,000 235,900

In addition, the company suffered a $27,700 uninsured factory fire loss during the year. What were Plunkett’s product costs and period costs for last year? Page 32 © 2008 Institute of Certified Management Accountants


a. b. c. d. 82.

Johnson’s best alternative use of the $200. Johnson’s best alternative use of the two hours it took to wait in line. the value of the $200 to the ticket agent. Johnson’s best alternative use of both the $200 and the two hours spent in line.

Which one of the following items would not be considered a manufacturing cost? a. b. c. d.

84.

Period $914,000. $651,600. $493,000. $465,300.

Johnson waits two hours in line to buy a ticket to an NCAA Final Four Tournament. The opportunity cost of buying the $200 ticket is a. b. c. d.

83.

Product $235,100 $497,500 $656,100 $683,800

Cream for an ice cream maker. Sales commissions for a car manufacturer. Plant property taxes for an ice cream maker. Tires for an automobile manufacturer.

Finley Painters Co., a painting contractor, maintains a job-order cost system. Job costs are accumulated by tracking the actual cost of paint and other materials used on each job, as well as the actual cost of wages earned by the painters on each job. In addition, overhead is applied to each job by using a predetermined rate based on the actual painters’ wages. Leonard Wayne, painter, earned $168 today by working on Job 97-45. In computing prime cost and conversion cost for Job 97-45, how would the wages earned today by Wayne be classified? a. b. c. d.

As a component of both prime and conversion cost. As a component of prime cost but not as a component of conversion cost. As a component of conversion cost, but not as a component of prime cost. As a component of neither prime cost nor conversion cost.



Taylor Corporation is determining the cost behavior of several items in order to budget for the upcoming year. Past trends have indicated the following dollars were spent at three different levels of output.

Cost A Cost B Cost C

Unit Levels 12,000 $29,000 15,000 18,000

10,000 $25,000 10,000 15,000

15,000 $35,000 15,000 22,500

In establishing a budget for 14,000 units, Taylor should treat Costs A, B, and C, respectively, as a. b. c. d. 86.

Which one of the following refers to a cost that remains the same as the volume of activity decreases within the relevant range? a. b. c. d.

87.

semivariable, fixed, and variable. variable, fixed, and variable. semivariable, semivariable, and semivariable. variable, semivariable, and semivariable.

Average cost per unit. Variable cost per unit. Unit fixed cost. Total variable cost.

Fowler Co. provides the following summary of its total budgeted production costs at three production levels. 1,000 Cost A Cost B Cost C Cost D

Volume in Units 1,500

$1,420 $1,550 $1,000 $1,630

$2,130 $2,200 $1,000 $2,445

2,000 $2,840 $2,900 $1,000 $3,260

The cost behavior of each of the Costs A through D, respectively, is a. b. c. d.

semi-variable, variable, fixed, and variable. variable, semi-variable, fixed, and semi-variable. variable, fixed, fixed, and variable. variable, semi-variable, fixed, and variable. Page 34 © 2008 Institute of Certified Management Accountants


Roberta Johnson is the manager of SleepWell Inn, one of a chain of motels located throughout the United States. An example of an operating cost at SleepWell that is semivariable is a. b. c. d.

89.

Indirect and common costs often make up a significant portion of the cost of a product. All of the following are reasons for indirect cost allocation to cost objects except to a. b. c. d.

90.

reduce total costs identified with products. measure income and assets for external reporting purposes. justify costs for reimbursement purposes. provide information for economic decision making.

The relevant range refers to the activity levels over which a. b. c. d.

91.

the security guard’s salary. electricity. postage for reservation confirmations. local yellow pages advertising.

cost relationships hold constant. costs fluctuate. production varies. relevant costs are incurred.

Cell Company has discovered that the cost of processing customer invoices is strictly variable within the relevant range. Which one of the following statements concerning the cost of processing customer invoices is incorrect? a. b. c. d.

The total cost of processing customer invoices will increase as the volume of customer invoices increases. The cost per unit for processing customer invoices will decline as the volume of customer invoices increases. The cost of processing the 100th customer invoice will be the same as the cost of processing the first customer invoice. The average cost per unit for processing a customer invoice will equal the incremental cost of processing one more customer invoice.



When identifying fixed and variable costs, which one of the following is a typical assumption concerning cost behavior? a. b. c. d.

93.

A management accountant is about to prepare graphs of total variable cost and per-unit variable cost for use in a short-term planning model. Dollars will be depicted on the vertical axis; activity will be shown on the horizontal axis. How will these graphs appear upon completion? a. b. c. d.

94.

Total Variable Cost Straight line, sloping upward to the right. Curvilinear, sloping upward to the right. Straight line, sloping upward to the right. Straight line, parallel to the horizontal axis.

Per-Unit Variable Cost Straight line, parallel to the horizontal axis. A line that basically parallels the horizontal axis, first decreasing and then increasing. Straight line, sloping upward to the right. Straight line, sloping upward to the right.

Which one of the following is the best reason for using variable costing? a. b. c. d.

95.

General and administrative costs are assumed to be variable costs. Cost behavior is assumed to be realistic for all levels of activity from zero to maximum capacity. Total costs are assumed to be linear when plotted on a graph. The relevant time period is assumed to be five years.

Fixed factory overhead is more closely related to the capacity to produce than to the production of specific units. All costs are variable in the long term. Variable costing is acceptable for income tax reporting purposes. Variable costing usually results in higher operating income than if a company uses absorption costing.

Lar Company has found that its total electricity cost has both a fixed component and a variable component within the relevant range. The variable component seems to vary directly with the number of units produced. Which one of the following statements concerning Lar’s electricity cost is incorrect? a. b. c. d.

The total electricity cost will increase as production volume increases. The total electricity cost per unit of production will increase as production volume increases. The variable electricity cost per unit of production will remain constant as production volume increases. The fixed electricity cost per unit of production will decline as production volume increases. Page 36 © 2008 Institute of Certified Management Accountants


When using activity-based costing techniques, which one of the following departmental activities would be expected to use machine hours as a cost driver to allocate overhead costs to production? a. b. c. d.

97.

Plant cafeteria. Machine setups. Material handling. Robotics painting.

A company employs a just-in-time (JIT) production system and utilizes backflush accounting. All acquisitions of raw materials are recorded in a raw materials control account when purchased. All conversion costs are recorded in a control account as incurred, while the assignment of conversion costs are from an allocated conversion cost account. Company practice is to record the cost of goods manufactured at the time the units are completed using the estimated budgeted cost of the goods manufactured. The budgeted cost per unit for one of the company's products is as follows Direct Materials Conversion costs Total budgeted unit cost

$15.00 35.00 $50.00

During the current accounting period, 80,000 units of product were completed, and 75,000 units were sold. The entry to record the cost of the completed units for the period would be a. Work-in-process - Control Raw Material - Control Conversion Cost Allocated b. Finished Goods - Control Raw Material - Control Conversion Cost Allocated c. Finished Goods - Control Raw Material Control Conversion Cost Allocated d. Cost of Goods Sold Raw Material - Control Conversion Cost Allocated

4,000,000 1,200,000 2,800,000. 4,000,000 1,200,000 2,800,000. 3,750,000 1,125,000 2,625,000. 3,750,000 1,125,000 2,625,000.



Normal costing systems are said to offer a user several distinct benefits when compared with actual costing systems. Which one of the following is not a benefit associated with normal costing systems? a. b. c. d.

99.

More timely costing of jobs and products. A smoothing of product costs throughout the period. Improved accuracy of job and product costing. A more economical way of attaching overhead to a job or product.

From the following budgeted data, calculate the budgeted indirect cost rate that would be used in a normal costing system. Total direct labor hours Direct costs Total indirect labor hours Total indirect-labor-related costs Total indirect non-labor related costs a. b. c. d.

100.

250,000 $10,000,000 50,000 $ 5,000,000 $ 7,000,000

$20. $28. $40. $48.

Loyal Co. produces three types of men’s undershirts: T-shirts, V-neck shirts, and athletic shirts. In the Folding and Packaging Department, operations costing is used to apply costs to individual units, based on the standard time allowed to fold and package each type of undershirt. The standard time to fold and package each type of undershirt is as follows. T-shirt V-neck shirt Athletic shirt

40 seconds per shirt 40 seconds per shirt 20 seconds per shirt

During the month of April, Loyal produced and sold 50,000 T-shirts, 30,000 V-neck shirts, and 20,000 athletic shirts. If costs in the Folding and Packaging Department were $78,200 during April, how much folding and packaging cost should be applied to each Tshirt? a. b. c. d.

$.52134. $.6256. $.7820. $.8689. Page 38 © 2008 Institute of Certified Management Accountants


101.

If a manufacturing company uses variable costing to cost inventories, which of the following costs are considered inventoriable costs? a. b. c. d.

102.

Manchester Airlines is in the process of preparing a contribution margin income statement that will allow a detailed look at its variable costs and profitability of operations. Which one of the following cost combinations should be used to evaluate the variable cost per flight of the company’s Boston-Las Vegas flights? a. b. c. d.

103.

Flight crew salary, fuel, and engine maintenance. Fuel, food service, and airport landing fees. Airplane depreciation, baggage handling, and airline marketing. Communication system operation, food service, and ramp personnel.

Xylon Company uses direct (variable) costing for internal reporting and absorption costing for the external financial statements. A review of the firm’s internal and external disclosures will likely find a. b. c. d.

104.

Only raw material, direct labor, and variable manufacturing overhead costs. Only raw material, direct labor, variable and fixed manufacturing overhead costs. Only raw material, direct labor, variable manufacturing overhead and variable selling and administrative costs. Only raw material and direct labor costs.

a difference in the treatment of fixed selling and administrative costs. a higher inventoriable unit cost reported to management than to the shareholders. a contribution margin rather than gross margin in the reports released to shareholders. internal income figures that vary closely with sales and external income figures that are influenced by both units sold and productive output.

The marketing manager of Ames Company has learned the following about a new product that is being introduced by Ames. Sales of this product are planned at $100,000 for the first year. Sales commission expense is budgeted at 8% of sales plus the marketing manager's incentive budgeted at an additional ½%. The preparation of a product brochure will require 20 hours of marketing salaried staff time at an average rate of $100 per hour, and 10 hours, at $150 per hour, for an outside illustrator's effort. The variable marketing cost for this new product will be a. b. c. d.



105.

Which of the following correctly shows the treatment of (1) factory insurance, (2) direct labor, and (3) finished goods shipping costs under absorption costing and variable costing?

a. b. c. d. 106.

Absorption Costing Product Cost Period Cost 1, 2 3 2 1, 3 1, 2 3 1 2, 3

Variable Costing Product Cost Period Cost 2 1, 3. 1, 2 3. 1 2, 3. 2, 3 1.

Dremmon Corporation uses a standard cost accounting system. Data for the last fiscal year are as follows. Units Beginning inventory of finished goods 100 Production during the year 700 Sales 750 Ending inventory of finished goods 50 Per Unit Product selling price Standard variable manufacturing cost Standard fixed manufacturing cost

$200 90 20*

Budgeted selling and administrative costs (all fixed)

$45,000

*Denominator level of activity is 750 units for the year. There were no price, efficiency, or spending variances for the year, and actual selling and administrative expenses equaled the budget amount. Any volume variance is written off to cost of goods sold in the year incurred. There are no work-in-process inventories. Assuming that Dremmon used absorption costing, the amount of operating income earned in the last fiscal year was a. b. c. d.

$21,500. $27,000. $28,000. $30,000.



Chassen Company, a cracker and cookie manufacturer, has the following unit costs for the month of June. Variable manufacturing cost $5.00

Variable marketing cost $3.50

Fixed manufacturing cost $2.00

Fixed marketing cost $4.00

A total of 100,000 units were manufactured during June of which 10,000 remain in ending inventory. Chassen uses the first-in, first-out (FIFO) inventory method, and the 10,000 units are the only finished goods inventory at month-end. Using the full absorption costing method, Chassen's finished goods inventory value would be a. b. c. d. 108.

$50,000. $70,000. $85,000. $145,000.

Merlene Company uses a standard cost accounting system. Data for the last fiscal year are as follows. Units Beginning inventory of finished goods 100 Production during the year 700 Sales 750 Ending inventory of finished goods 50 Product selling price Standard variable manufacturing cost Standard fixed manufacturing cost

Per Unit $200 90 20*


$45,000

*Denominator level of activity is 750 units for the year. There were no price, efficiency, or spending variances for the year, and actual selling and administrative expenses equaled the budget amount. Any volume variance is written off to cost of goods sold in the year incurred. There are no work-in-process inventories. The amount of operating income earned by Merlene for the last fiscal year using variable costing was a. b. c. d.



Merlene Company uses a standard cost accounting system. Data for the last fiscal year are as follows. Units Beginning inventory of finished goods 100 Production during the year 700 Sales 750 Ending inventory of finished goods 50 Product selling price Standard variable manufacturing cost Standard fixed manufacturing cost

Per Unit $200 90 20*


$45,000

*Denominator level of activity is 750 units for the year. There were no price, efficiency, or spending variances for the year, and actual selling and administrative expenses equaled the budget amount. Any volume variance is written off to cost of goods sold in the year incurred. There are no work-in-process inventories. The amount of operating income earned by Merlene for the last fiscal year using variable costing was a. b. c. d. 110.

$21,500. $22,500. $28,000. $31,000.

Bethany Company has just completed the first month of producing a new product but has not yet shipped any of this product. The product incurred variable manufacturing costs of $5,000,000, fixed manufacturing costs of $2,000,000, variable marketing costs of $1,000,000, and fixed marketing costs of $3,000,000. If Bethany uses the variable cost method to value inventory, the inventory value of the new product would be a. b. c. d.

$5,000,000. $6,000,000. $8,000,000. $11,000,000.



Consider the following situation for Weisman Corporation for the prior year. • • •

•

The company produced 1,000 units and sold 900 units, both as budgeted. There were no beginning or ending work-in-process inventories and no beginning finished goods inventory. Budgeted and actual fixed costs were equal, all variable manufacturing costs are affected by volume of production only, and all variable selling costs are affected by sales volume only. Budgeted per unit revenues and costs were as follows. Sales price Direct materials Direct labor Variable manufacturing costs Fixed manufacturing costs Variable selling costs Fixed selling costs ($3,600 total) Fixed administrative costs ($1,800 total)

Per Unit $100 30 20 10 5 12 4 2

The operating income for Weisman for the prior year using absorption costing was a. b. c. d. 112.

$13,600. $14,200. $15,300. $15,840.

Consider the following situation for Donaldson Company for the prior year. • • •

•

The company produced 1,000 units and sold 900 units, both as budgeted. There were no beginning or ending work-in-process inventories and no beginning finished goods inventory. Budgeted and actual fixed costs were equal, all variable manufacturing costs are affected by volume of production only, and all variable selling costs are affected by sales volume only. Budgeted per unit revenues and costs were as follows. Sales price Direct materials Direct labor Variable manufacturing costs Fixed manufacturing costs Variable selling costs

Per Unit $100 30 20 10 5 12


CMA Exam Retired Questions Fixed selling costs ($3,600 total) Fixed administrative costs ($1,800 total)

4 2

Assuming that Donaldson uses variable costing, the operating income for the prior year was a. b. c. d. 113.

When comparing absorption costing with variable costing, the difference in operating income can be explained by the difference between the a. b. c. d.

114.

$13,600. $14,200. $14,800. $15,300.

units sold and the units produced, multiplied by the unit sales price. ending inventory in units and the beginning inventory in units, multiplied by the budgeted fixed manufacturing cost per unit. ending inventory in units and the beginning inventory in units, multiplied by the unit sales price. units sold and the units produced, multiplied by the budgeted variable manufacturing cost per unit.

Mill Corporation had the following unit costs for the recently concluded calendar year. Manufacturing Nonmanufacturing

Variable $8.00 $2.00

Fixed $3.00 $5.50

Inventory for Mill’s sole product totaled 6,000 units on January 1 and 5,200 units on December 31. When compared to variable costing income, Mill’s absorption costing income is a. b. c. d. 115.

$2,400 lower. $2,400 higher. $6,800 lower. $6,800 higher.

During the month of May, Robinson Corporation sold 1,000 units. The cost per unit for May was as follows. Cost Per Unit $ 5.50 3.00

Direct materials Direct labor Page 44


CMA Exam Retired Questions Variable manufacturing overhead Fixed manufacturing overhead Variable administrative costs Fixed administrative costs Total

1.00 1.50 .50 3.50 $15.00

May’s income using absorption costing was $9,500. The income for May, if variable costing had been used, would have been $9,125. The number of units Robinson produced during May was a. b. c. d. 116.

Dawn Company has significant fixed overhead costs in the manufacturing of its sole product, auto mufflers. For internal reporting purposes, in which one of the following situations would ending finished goods inventory be higher under direct (variable) costing rather than under absorption costing? a. b. c. d.

117.

If more units were produced than were sold during a given year. If more units were sold than were produced during a given year. In all cases when ending finished goods inventory exists. None of these situations.

The primary purpose for allocating common costs to joint products is to determine a. b. c. d.

118.

750 units. 925 units. 1,075 units. 1,250 units.

the selling price of a by-product. whether or not one of the joint products should be discontinued. the variance between budgeted and actual common costs. the inventory cost of joint products for financial reporting.

The distinction between joint products and by-products is largely dependent on a. b. c. d.

historical costs. prime costs. market value. salvage value.



In a production process where joint products are produced, the primary factor that will distinguish a joint product from a by-product is the a. b. c. d.

120.

All of the following are methods of allocating joint costs to joint products except a. b. c. d.

121.

physical quantities method. net realizable value method. separable production cost method. gross market value method.

Tucariz Company processes Duo into two joint products, Big and Mini. Duo is purchased in 1,000 gallon drums for $2,000. Processing costs are $3,000 to process the 1,000 gallons of Duo into 800 gallons of Big and 200 gallons of Mini. The selling price is $9 per gallon for Big and $4 per gallon for Mini. Big can be processed further into 600 gallons of Giant if $1,000 of additional processing costs are incurred. Giant can be sold for $17 per gallon. If the net-realizable-value method were used to allocate costs to the joint products, the total cost of producing Giant would be a. b. c. d.

122.

relative total sales value of the products. relative total volume of the products. relative ease of selling the products. accounting method used to allocate joint costs.

$5,600. $5,564. $5,520. $4,600.

Tucariz Company processes Duo into two joint products, Big and Mini. Duo is purchased in 1,000 gallon drums for $2,000. Processing costs are $3,000 to process the 1,000 gallons of Duo into 800 gallons of Big and 200 gallons of Mini. The selling price is $9 per gallon for Big and $4 per gallon for Mini. If the sales value at splitoff method is used to allocate joint costs to the final products, the per gallon cost (rounded to the nearest cent) of producing Big is a. b. c. d.

$5.63 per gallon. $5.00 per gallon. $4.50 per gallon. $3.38 per gallon.



Tempo Company produces three products from a joint process. The three products are sold after further processing as there is no market for any of the products at the split-off point. Joint costs per batch are $315,000. Other product information is shown below. Units produced per batch Further processing and marketing cost per unit Final sales value per unit

Product A 20,000 $ .70 5.00

Product B 30,000 $3.00 6.00

Product C 50,000 $1.72 7.00

If Tempo uses the net realizable value method of allocating joint costs, how much of the joint costs will be allocated to each unit of Product C? a. b. c. d 124.

Fitzpatrick Corporation uses a joint manufacturing process in the production of two products, Gummo and Xylo. Each batch in the joint manufacturing process yields 5,000 pounds of an intermediate material, Valdene, at a cost of $20,000. Each batch of Gummo uses 60% of the Valdene and incurs $10,000 of separate costs. The resulting 3,000 pounds of Gummo sells for $10 per pound. The remaining Valdene is used in the production of Xylo which incurs $12,000 of separable costs per batch. Each batch of Xylo yields 2,000 pounds and sells for $12 per pound. Fitzpatrick uses the net realizable value method to allocate the joint material costs. The company is debating whether or not to process Xylo further into a new product, Zinten, which would incur an additional $4,000 in costs and sell for $15 per pound. If Zinten is produced, income would increase by a. b. c. d.

125.

$2.10. $2.65. $3.15. $3.78.

$2,000. $5,760. $14,000. $26,000.

A company is considering the implementation of an activity-based costing and management program. The company a. b. c. d.

should focus on manufacturing activities and avoid implementation with servicetype functions. would probably find a lack of software in the marketplace to assist with the related recordkeeping. would normally gain added insights into causes of cost. would likely use fewer cost pools than it did under more traditional accounting methods. Page 47 © 2008 Institute of Certified Management Accountants


Mack Inc. uses a weighted-average process costing system. Direct materials and conversion costs are incurred evenly during the production process. During the month of October, the following costs were incurred. Direct materials Conversion costs

$39,700 70,000

The work-in-process inventory as of October 1 consisted of 5,000 units, valued at $4,300, that were 20% complete. During October, 27,000 units were transferred out. Inventory as of October 31 consisted of 3,000 units that were 50% complete. The weighted-average inventory cost per unit completed in October was a. b. c. d. 127.

$3.51. $3.88. $3.99. $4.00.

During December, Krause Chemical Company had the following selected data concerning the manufacture of Xyzine, an industrial cleaner. Production Flow Completed and transferred to the next department Add:

Ending work-in-process inventory Total units to account for

Less: Beginning work-in-process inventory Units started during December

Physical Units 100 10 (40% complete as to conversion) 110 20 (60% complete as to conversion) 90

All material is added at the beginning of processing in this department, and conversion costs are added uniformly during the process. The beginning work-in-process inventory had $120 of raw material and $180 of conversion costs incurred. Material added during December was $540 and conversion costs of $1,484 were incurred. Krause uses the weighted-average process-costing method. The total raw material costs in the ending work-in-process inventory for December is a. b. c. d.

$120. $72. $60. $36.



Fashion Inc. manufactures women’s dresses using cotton and polyester. Since the same style dresses are made out of both fabrics, Fashions uses operation costing. During June, 1,000 cotton dresses were completely produced. Also during June, 1,500 polyester dresses were started by adding all materials at the beginning of the process. Of these 1,500 dresses, 700 were completely finished and the remainder were 25 percent complete by the end of the month. There was no work-in-process inventory at the beginning of June. Costs incurred during June were as follows. Cotton Polyester Conversion costs

$10,000 22,500 13,300

The cost per unit to manufacture one polyester dress during June was a. b. c. d. 129.

Darden Manufacturing, a calendar-year corporation, had $17,000 of spoilage during April that production management characterized as abnormal. The spoilage was incurred on Job No. 532, that was sold three months later for $459,000. Which of the following correctly describes the impact of the spoilage on Darden’s unit manufacturing cost for Job No. 532 and on the year’s operating income? a. b. c. d.

130.

$18.32. $20.32. $22.00. $32.00

Unit Manufacturing Cost Increase. Increase. No effect. No effect.

Operating Income No effect. Decrease. Decrease. Not enough information to judge.

A company that uses a process costing system inspects its goods at the 60% stage of completion. If the firm’s ending work-in-process inventory is 80% complete, how would the firm account for its normal and abnormal spoilage? a. b. c. d.

Both normal and abnormal spoilage costs would be added to the cost of the good units completed during the period. Both normal and abnormal spoilage costs would be written off as an expense of the period. Normal spoilage costs would be added to the cost of the good units completed during the period; in contrast, abnormal spoilage costs would be written off as a loss. Normal spoilage costs would be allocated between the cost of good units completed during the period and the ending work-in-process inventory. In contrast, abnormal spoilage costs would be written off as a loss. Page 49 © 2008 Institute of Certified Management Accountants


When considering normal and abnormal spoilage, which one of the following is theoretically the best accounting method for spoilage in a process-costing system? a. b. c. d.

132.

Both normal and abnormal spoilage cost should be charged to a separate expense account. Normal spoilage cost should be charged to good units and abnormal spoilage cost should be charged to a separate expense account. Both normal and abnormal spoilage costs should be charged to good units. Normal spoilage costs should be charged to a separate expense account and abnormal spoilage cost should be charged to good units.

Southwood Industries uses a process costing system and inspects its goods at the end of manufacturing. The inspection as of June 30 revealed the following information for the month of June. Good units completed Normal spoilage (units) Abnormal spoilage (units)

16,000 300 100

Unit costs were: materials, $3.50; and conversion costs, $6.00. The number of units that Southwood would transfer to its finished goods inventory and the related cost of these units are a. b. c. d. 133.

Units Transferred 16,000 16,000 16,000 16,300

Cost $152,000. $154,850. $155,800. $154,850.

Colt Company uses a weighted-average process cost system to account for the cost of producing a chemical compound. As part of production, Material B is added when the goods are 80% complete. Beginning work-in-process inventory for the current month was 20,000 units, 90% complete. During the month, 70,000 units were started in process, and 65,000 of these units were completed. There were no lost or spoiled units. If the ending inventory was 60% complete, the total equivalent units for Material B for the month was a. b. c. d.




Oster Manufacturing uses a weighted-average process costing system and has the following costs and activity during October. Materials Conversion cost Total beginning work-in-process inventory Materials $ 700,000 Conversion cost Total production costs - October Production completed Work-in-process, October 31

$40,000 32,500 $72,500 617,500 $1,317,500 60,000 units 20,000 units

All materials are introduced at the start of the manufacturing process, and conversion cost is incurred uniformly throughout production. Conversations with plant personnel reveal that, on average, month-end in-process inventory is 25% complete. Assuming no spoilage, how should Oster’s October manufacturing cost be assigned? a. b. c. d. 135.

Production Completed $1,042,500 $1,095,000 $1,155,000 $1,283,077

Work-in-Process $347,500. $222,500. $235,000. $106,923.

San Jose Inc. uses a weighted-average process costing system. All materials are introduced at the start of manufacturing, and conversion cost is incurred evenly throughout production. The company started 70,000 units during May and had the following work-in-process inventories at the beginning and end of the month. May 1

30,000 units, 40% complete

May 31

24,000 units, 25% complete

Assuming no spoilage or defective units, the total equivalent units used to assign costs for May are a. b. c. d.

Materials 70,000 82,000 100,000 100,000

Conversion Cost 70,000. 82,000. 70,000. 82,000.



During December, Krause Chemical Company had the following selected data concerning the manufacture of Xyzine, an industrial cleaner. Production Flow Completed and transferred to the next department Add:



Physical Units 100 10 (40% complete as to conversion) 110 20 (60% complete as to conversion) 90

All material is added at the beginning of processing in this department, and conversion costs are added uniformly during the process. The beginning work-in-process inventory had $120 of raw material and $180 of conversion costs incurred. Material added during December was $540 and conversion costs of $1,484 were incurred. Krause uses the weighted-average process-costing method. The total conversion cost assigned to units transferred to the next department in December was a. b. c. d. 137.

$1,664. $1,600. $1,513. $1,484.

During December, Krause Chemical Company had the following selected data concerning the manufacture of Xyzine, an industrial cleaner. Production Flow Completed and transferred to the next department

Physical Units 100

Add:

10 (40% complete as to conversion) 110



20 (60% complete as to conversion) 90

All material is added at the beginning of processing in this department, and conversion costs are added uniformly during the process. The beginning work-in-process inventory had $120 of raw material and $180 of conversion costs incurred. Material added during December was $540 and conversion costs of $1,484 were incurred. Krause uses the firstPage 52 © 2008 Institute of Certified Management Accountants

CMA Exam Retired Questions in, first-out (FIFO) process-costing method. The equivalent units of production used to calculate conversion costs for December was a. b. c. d. 138.

110 units. 104 units. 100 units. 92 units.

Jones Corporation uses a first-in, first-out (FIFO) process costing system. Jones has the following unit information for the month of August. Units Beginning work-in-process inventory, 100% complete for materials, 75% complete for conversion cost

10,000

Units complete and transferred out

90,000

Ending work-in-process inventory, 100% complete for materials, 60% complete for conversion costs

8,000

The number of equivalent units of production for conversion costs for the month of August is a. b. c. d. 139.

87,300. 88,000. 92,300. 92,700.

Waller Co. uses a weighted-average process-costing system. Material B is added at two different points in the production of shirms, 40% is added when the units are 20% completed, and the remaining 60% of Material B is added when the units are 80% completed. At the end of the quarter, there are 22,000 shirms in process, all of which are 50% completed. With respect to Material B, the ending shirms in process represent how many equivalent units? a. b. c. d.




All of the following are likely to be used as a cost allocation base in activity-based costing except the a. b. c. d.

141.

number of different materials used to manufacture the product. units of materials used to manufacture the product. number of vendors supplying the materials used to manufacture the product. cost of materials used to manufacture the product.

Pelder Products Company manufactures two types of engineering diagnostic equipment used in construction. The two products are based upon different technologies, x-ray and ultra-sound, but are manufactured in the same factory. Pelder has computed the manufacturing cost of the x-ray and ultra-sound products by adding together direct materials, direct labor, and overhead cost applied based on the number of direct labor hours. The factory has three overhead departments that support the single production line that makes both products. Budgeted overhead spending for the departments is as follows. Engineering design $6,000

Department Material handling $5,000

Setup $3,000

Total $14,000

Pelder’s budgeted manufacturing activities and costs for the period are as follows. Product Activity X-Ray Ultra-Sound Units produced and sold 50 100 Direct materials used $5,000 $8,000 Direct labor hours used 100 300 Direct labor cost $4,000 $12,000 Number of parts used 400 600 Number of engineering changes 2 1 Number of product setups 8 7 The budgeted cost to manufacture one ultra-sound machine using the activity-based costing method is a. b. c. d. 142.

$225. $264. $293. $305.

The Chocolate Baker specializes in chocolate baked goods. The firm has long assessed the profitability of a product line by comparing revenues to the cost of goods sold. However, Barry White, the firm’s new accountant, wants to use an activity-based costing system that takes into consideration the cost of the delivery person. Listed below are activity and cost information relating to two of Chocolate Baker’s major products. Page 54 © 2008 Institute of Certified Management Accountants


Revenue Cost of goods sold

Muffins $53,000 26,000

Cheesecake $46,000 21,000

Delivery Activity Number of deliveries Average length of delivery Cost per hour for delivery

150 10 Minutes $20.00

85 15 Minutes $20.00

Using activity-based costing, which one of the following statements is correct? a. b. c. d.

143.

The muffins are $2,000 more profitable. The cheesecakes are $75 more profitable. The muffins are $1,925 more profitable. The muffins have a higher profitability as a percentage of sales and, therefore, are more advantageous.

Atmel Inc. manufactures and sells two products. Data with regard to these products are given below. Product A Product B Units produced and sold Machine hours required per unit Receiving orders per product line Production orders per product line Production runs Inspections

30,000 2 50 12 8 20

12,000 3 150 18 12 30

Total budgeted machine hours are 100,000. The budgeted overhead costs are shown below. Receiving costs Engineering costs Machine setup costs Inspection costs Total budgeted overhead costs

$ 450,000 300,000 25,000 200,000 $ 975,000

Using activity-based costing, the per unit overhead cost allocation of receiving costs for product A is a. b. c. d.

$3.75. $10.75. $19.50. $28.13. Page 55 © 2008 Institute of Certified Management Accountants


A company employs a just-in-time (JIT) production system and utilizes backflush accounting. All acquisitions of raw materials are recorded in a raw materials control account when purchased. All conversion costs are recorded in a control account as incurred, while the assignment of conversion costs are from an allocated conversion cost account. Company practice is to record the cost of goods at the time the units are completed using the estimated budgeted cost of the goods. At the end of an accounting period, any minor difference in actual conversion cost incurred in the control account and the budgeted conversion cost assigned to production are recorded in the allocated conversion cost account would be a. b. c. d.

145.

written-off to cost of goods sold. written-off to finished goods-control. written-off to raw materials-control. prorated to work-in-process-control, finished goods-control, and cost of goods sold.

Henry Manufacturing, which uses direct labor hours to apply overhead to its product line, undertook an extensive renovation and modernization program two years ago. Manufacturing processes were reengineered, considerable automated equipment was acquired, and 60% of the company’s nonunion factory workers were terminated. Which of the following statements would apply to the situation at Henry? I. II. III. IV. a. b. c. d.

146.

The company’s factory overhead rate has likely increased. The use of direct labor hours seems to be appropriate. Henry will lack the ability to properly determine labor variances. Henry has likely reduced its ability to quickly cut costs in order to respond to economic downturns.

I, II, III, and IV. I and IV only. II and IV only. I and III only.

A profitable company with five departments uses plantwide overhead rates for its highly diversified operation. The firm is studying a change to either allocating overhead by using departmental rates or using activity-based costing (ABC). Which one of these two methods will likely result in the use of a greater number of cost allocation bases and more accurate costing results?

a. b. c. d.

Greater Number of Allocation Bases Departmental Departmental ABC ABC

More Accurate Costing Results Departmental. ABC. Departmental. ABC. Page 56



Young Company is beginning operations, and is considering three alternative ways in which to allocate manufacturing overhead to individual units produced. Young can use a plantwide rate, departmental rates, or activity based costing. Young will produce many types of products in its single plant, and not all products will be processed through all departments. In which one of the following independent situations would reported net income for the first year be the same regardless of which overhead allocation method had been selected? a. b. c. d.

148.

The most important criterion in accurate cost allocations is a. b. c. d.

149.

All production costs approach those costs that were budgeted. The sales mix does not vary from the mix that was budgeted. All manufacturing overhead is a fixed cost. All ending inventory balances are zero.

using a simple allocation method. allocating fixed and variable costs by using the same allocation base. using homogeneous cost pools. using multiple drivers for each cost pool.

Baldwin Printing Company uses a job order costing system and applies overhead based on machine hours. A total of 150,000 machine hours have been budgeted for the year. During the year, an order for 1,000 units was completed and incurred the following. Direct material costs Direct labor costs Actual overhead Machine hours

$1,000 1,500 1,980 450

The accountant calculated the inventory cost of this order to be $4.30 per unit. The annual budgeted overhead in dollars was a. b. c. d.

$577,500. $600,000. $645,000. $660,000.



John Sheng, cost accountant at Starlet Company, is developing departmental factory overhead application rates for the company's tooling and fabricating departments. The budgeted overhead for each department and the data for one job are shown below. Departments Tooling Fabricating Supplies Supervisors' salaries Indirect labor Depreciation Repairs

$ 850 1,500 1,200 1,000 4,075

$

Total budgeted overhead

$8,625

$16,120

460

620

12

3

Total direct labor hours Direct labor hours on Job #231

200 2,000 4,880 5,500 3,540

Using the departmental overhead application rates, total overhead applied to Job #231 in the Tooling and Fabricating Departments will be a. b. c. d. 151.

$225. $303. $537. $671.

Cynthia Rogers, the cost accountant for Sanford Manufacturing, is preparing a management report which must include an allocation of overhead. The budgeted overhead for each department and the data for one job are shown below. Department Tooling Fabricating $ 690 $ 80 1,400 1,800 1,000 4,000 1,200 5,200 4,400 3,000 $8,690 $14,080

Supplies Supervisor's salaries Indirect labor Depreciation Repairs Total budgeted overhead Total direct labor hours Direct labor hours on Job #231

440

640

10

2


CMA Exam Retired Questions Using the departmental overhead application rates, and allocating overhead on the basis of direct labor hours, overhead applied to Job #231 in the Tooling Department would be a. b. c. d. 152.

Patterson Corporation expects to incur $70,000 of factory overhead and $60,000 of general and administrative costs next year. Direct labor costs at $5 per hour are expected to total $50,000. If factory overhead is to be applied per direct labor hour, how much overhead will be applied to a job incurring 20 hours of direct labor? a. b. c. d.

153.

$28. $120. $140. $260.

When allocating costs from one department to another, a dual-rate cost-allocation method may be used. The dual-rate cost-allocation method is most useful when a. b. c. d.

154.

$44.00 $197.50 $241.50 $501.00.

two or more cost pools are to be allocated. two or more departments’ costs are to be allocated. two or more products are produced. costs are separated into variable-cost and fixed-cost subpools.

The management of ROX Company wishes to encourage all other departments to use the legal department, as circumstances warrant. To accomplish this, legal department costs should be a. b. c. d.

allocated to users on the basis of the actual cost of hours used. allocated to users on the basis of the budgeted cost of actual hours used. allocated to users on the basis of standard cost for the type of service provided. absorbed as a corporate expense.



Jones Tax Company has three divisions - Compliance, Tax Planning, and Financial Consulting. Based on the divisional data presented below, which one of the allocation bases for common company expenses would likely have the least negative behavioral impact on the Financial Consulting Division manager? Compliance $4,500,000 1,500,000 68

Revenues Variable expenses No. of employees a. b. c. d. 156.

Tax Planning $6,000,000 3,750,000 76

Financial Consulting $4,500,000 2,250,000 56

Revenues. Contribution margin. Equal sharing. Number of employees.

Atmel Inc. manufactures and sells two products. Data with regard to these products are given below. Product A Product B Units produced and sold Machine hours required per unit Receiving orders per product line Production orders per product line Production runs Inspections

30,000 2 50 12 8 20

12,000 3 150 18 12 30

Total budgeted machine hours are 100,000. The budgeted overhead costs are shown below. Receiving costs Engineering costs Machine setup costs Inspection costs Total budgeted overhead

$450,000 300,000 25,000 200,000 $975,000

The cost driver for engineering costs is the number of production orders per product line. Using activity-based costing, the engineering cost per unit for Product B would be a. b. c. d.

$4.00. $10.00. $15.00. $29.25.



Boston Furniture Company manufactures several steel products. It has three production departments, Fabricating, Assembly, and Finishing. The service departments include Maintenance, Material Handling, and Designing. Currently, the company does not allocate service department costs to the production departments. John Baker, who has recently joined the company as the new cost accountant, believes that service department rates should be developed and charged to the production departments for services requested. If the company adopts this new policy, the production department managers would be least likely to a. b. c. d.

158.

Cotton Company has two service departments and three operating departments. In allocating service department costs to the operating departments, which of the following three methods (direct, step-down, reciprocal) will result in the same amount of service department costs being allocated to each operating department, regardless of the order in which the service department costs are allocated? a. b. c. d.

159.

request an excessive amount of service. replace outdated and inefficient systems. refrain from using necessary services. be encouraged to control costs.

Direct and reciprocal methods only. Step-down and reciprocal methods only. Direct and step-down methods only. Direct method only.

Wilcox Industrial has two support departments, the Information Systems Department and the Personnel Department, and two manufacturing departments, the Machining Department and the Assembly Department. The support departments service each other as well as the two production departments. Company studies have shown that the Personnel Department provides support to a greater number of departments than the Information Systems Department. Which one of the following departmental allocations is present in the reciprocal method of departmental allocation? The costs of the a. b. c. d.

Assembly Department are allocated to the Information Systems Department and the Personnel Department. Information Systems Department are allocated to the Machining Department and the costs of the Machining Department are allocated to the Assembly Department. Personnel Department are allocated solely to the Information Systems Department. Information Systems Department are allocated to the Personnel Department, Machining Department, and Assembly Department.



Wilcox Industrial has two support departments, the Information Systems Department and the Personnel Department, and two manufacturing departments, the Machining Department and the Assembly Department. The support departments service each other as well as the two production departments. Company studies have shown that the Personnel Department provides support to a greater number of departments than the Information Systems Department. If Wilcox uses the step-down method of departmental allocation, which one of the following cost allocations would not occur? Some of the costs of the a. b. c. d.

161.

Render Inc. has four support departments (maintenance, power, human resources, and legal) and three operating departments. The support departments provide services to the operating departments as well as to the other support departments. The method of allocating the costs of the support departments that best recognizes the mutual services rendered by support departments to other support departments is the a. b. c. d.

162.

Personnel Department would be allocated to the Information Systems Department. Information Systems Department would be allocated to the Personnel Department. Personnel Department would be allocated to the Assembly Department. Personnel Department would be allocated to the Assembly Department and the Machining Department.

direct allocation method. dual-rate allocation method. step-down allocation method. reciprocal allocation method.

Logo Inc. has two data services departments (the Systems Department and the Facilities Department) that provide support to the company’s three production departments (Machining Department, Assembly Department, and Finishing Department). The overhead costs of the Systems Department are allocated to other departments on the basis of computer usage hours. The overhead costs of the Facilities Department are allocated based on square feet occupied (in thousands). Other information pertaining to Logo is as follows. Department Systems Facilities Machining Assembly Finishing

Overhead $200,000 100,000 400,000 550,000 620,000

Computer Usage Hours 300 900 3,600 1,800 2,700 9,300


Square Feet Occupied 1,000 600 2,000 3,000 5,000 11,600

CMA Exam Retired Questions If Logo employs the direct method of allocating service department costs, the overhead of the Systems Department would be allocated by dividing the overhead amount by a. b. c. d. 163.

1,200 hours. 8,100 hours. 9,000 hours. 9,300 hours.

Adam Corporation manufactures computer tables and has the following budgeted indirect manufacturing cost information for next year. Support Departments Operating Departments Maintenance Systems Machining Fabrication Budgeted overhead

$360,000

Support work furnished From Maintenance From Systems 5%

$95,000 10%

$200,000

$300,000

50% 45%

40% 50%

Total $955,000 100% 100%

If Adam uses the step-down method, beginning with the Maintenance Department, to allocate support department costs to production departments, the total overhead (rounded to the nearest dollar) for the Machining Department to allocate to its products would be a. b. c. d. 164.

$415,526. $422,750. $442,053. $445,000.

Wilcox Industrial has two support departments, the Information Systems Department and the Personnel Department, and two manufacturing departments, the Machining Department and the Assembly Department. The support departments service each other as well as the two production departments. Company studies have shown that the Personnel Department provides support to a greater number of departments than does the Information Systems Department. If Wilcox uses the direct method of departmental allocation, which one of the following cost allocations would occur? Some of the costs of the a. b. c. d.

Personnel Department would be allocated to the Information Systems Department. Machining Department would be allocated to the Information Systems Department. Information Systems Department would be allocated to the Assembly Department. Assembly Department would be allocated to the Machining Department. Page 63 © 2008 Institute of Certified Management Accountants


Logo Inc. has two data services departments (the Systems Department and the Facilities Department) that provide support to the company’s three production departments (Machining Department, Assembly Department, and Finishing Department). The overhead costs of the Systems Department are allocated to other departments on the basis of computer usage hours. The overhead costs of the Facilities Department are allocated based on square feet occupied (in thousands). Other information pertaining to Logo is as follows. Computer Square Feet Department Overhead Usage Hours Occupied Systems $200,000 300 1,000 Facilities 100,000 900 600 Machining 400,000 3,600 2,000 Assembly 550,000 1,800 3,000 Finishing 620,000 2,700 5,000 9,300 11,600 Logo employs the step-down method of allocating service department costs and begins with the Systems Department. Which one of the following correctly denotes the amount of the Systems Department’s overhead that would be allocated to the Facilities Department and the Facilities Department’s overhead charges that would be allocated to the Machining Department? a. b. c. d.

166.

Systems to Facilities $0 $19,355 $20,000 $20,000

Facilities to Machining $20,000. $20,578. $20,000. $24,000.

Adam Corporation manufactures computer tables and has the following budgeted indirect manufacturing cost information for next year. Support Departments Operating Departments Maintenance Systems Machining Fabrication Total Budgeted overhead $360,000 $95,000 $200,000 $300,000 $955,000 Support work furnished From Maintenance 10% 50% 40% 100% From Systems 5% 45% 50% 100% If Adam uses the direct method to allocate support department costs to production departments, the total overhead (rounded to the nearest dollar) for the Machining Department to allocate to its products would be a. b. c. d.


CMA Exam Retired Questions Section C: Information Management 167.

Which one of the following statements is least correct when describing an accounting information system. An accounting information system a. b. c. d.

168.

Which one of the following is often described as a transaction processing system? a. b. c. d.

169.

Remote procedure calls. Stored procedures. Transaction monitors. Triggers.

When describing an accounting information system which of the following statements is incorrect? An accounting information system a. b. c. d.

171.

Executive information system. Accounting information system. Decision support system. Expert system.

Structured Query Language (SQL) performance is most greatly enhanced with the use of which one of the following? a. b. c. d.

170.

is used to process sales transactions and track payments to various vendors. is often integrated with other information systems. is used for both segment and corporate performance measurements. provides information well suited for decisions pertaining to the introduction of replacement product lines.

is often the most widely used system of a business organization. is the only formally designated system in some organizations. is integrated with other information systems in many organizations. provides management with immediate access to information in an highly interactive format.

Adam Bourch, manager of property accounting, has difficulty responding to requests from the manufacturing division for maintenance schedules, part replacements, and insurance coverage. His responses are often incomplete and/or difficult to develop. What objectives should Bourch establish for redesigning the property accounting system that would minimize difficulties in providing requested information? Page 65 © 2008 Institute of Certified Management Accountants

CMA Exam Retired Questions a. b. c. d.

172.

Which one of the following is typically a disadvantage of a decision to purchase an accounting information system (AIS) rather than developing one in-house? a. b. c. d.

173.

b. c. d.

Determine the amount of uncertainty associated with developing such an application and its potential for success. Make an evaluation of the costs and benefits expected from the application. Evaluate the degree of the structured, unstructured, and semi-structured decisions resulting from the application. Interview the users, evaluate existing applications, and develop a prototype of the proposed application.

Work measurement techniques are most often performed during which of the following system study phases? a. b. c. d.

175.

Longer time horizon to implement. Lack of system flexibility. More prone to system errors. Expertise is difficult to acquire.

A new information system application is requested by a firm’s management. It will be designed, programmed, and implemented in-house. Upon cutover, results will be provided to appropriate users. With this sequence of events, what strategy should be used for determining the requirements of the new application? a.

174.

Completeness, timeliness, relevance, and flexibility. Modular conversion, real-time response, and user awareness. Acceptance testing, flexibility, accuracy, and proper documentation. User awareness, systems evaluation, application evaluation, and proper documentation.

Analysis. Design. Implementation. Planning.

A software development methodology that emphasizes interactive, iterative demonstrations to the end users is best described by which one of the following? a. b. c. d.

Computer-assisted software engineering. Object oriented programming. Prototyping. Language translators. Page 66 © 2008 Institute of Certified Management Accountants


176.

177.

Which one of the following is not an example of electronic conferencing tools? a.

Chat systems.

b. c. d.

Whiteboarding. Online processing. Video conferencing.

An accounting information system that transfers changes in invoice images automatically to accounts payable report files is most likely utilizing which one of the following technologies? a. b. c. d.

178.

Network performance is most closely related to which one of the following? a. b. c. d.

179.

Bandwidth. Clock speed. Redundancy. Processing controls.

The best examples of communication mediums are a. b. c. d.

180.

Open database connectivity (ODBC). Object linking and embedding (OLE). On-line transaction processing (OLTP). Object oriented programming (OOP).

local area networks, wide-area networks, and file servers. wide-area networks, electronic data interchange, and E-Mail. telecommuting, internet, and client/server computing. coaxial cables, optical fibers, and microwaves.

Local area networks (LANs) are generally connected to other LANs in different locations through the use of a a. b. c. d.

hub. controller. router. multiplexer.



All of the following are Local Area Network (LAN) topologies except a. b. c. d.

182.

183.

Which one of the following is not a characteristic of the client-server network model? a.

It consists of desktop computers and clients; requests for data are sent from the clients to the server.

b. c. d.

It permits other clients to access different records in the same file simultaneously. It can be configured in various ways, including the ring, star or bus topologies. It processes client requests to the server for an entire file of records rather than a subset of the data.

Which one of the following networks connect workstations directly to each other via the internet? a. b. c. d.

184.

Peer-to-peer networks. Hierarchical networks. Two-tier client server networks. Three-tier client server networks.

The relational database theory which states that data should be organized with minimum redundancy is referred to as a. b. c. d.

185.

bus. cluster. ring. star.

consolidation. normalization. optimization. rationalization.

Which one of the following is the most frequently used standard language for interacting with relational databases? a. b. c. d.

COBOL. Visual Basic. Structured Query Language (SQL). Groupware.



A Decision Support System (DSS) is an organized collection of all of the following except a. b. c. d.

187.

Which one of the following statements represents the major difference between a Decision Support System (DSS) and an Expert System (ES)? a. b. c. d.

188.

DSS supports management’s judgment, but does not replace it; while ES can act alone, like a human expert, in a certain area or discipline. DSS has a user interface to allow access for decision makers; while ES allows for user access to the system. DSS uses a data base; while ES uses a knowledge base. DSS users have a generator for problem formulation; while ES has an inference engine to formulate suggestions and conclusions.

In an expert system, logic and reasoning take place in the a. b. c. d.

189.

databases. model bases. procedures. transaction processes.

explanation facility. inference engine. knowledge base. knowledge acquisition facility.

Larson Industries has developed a spreadsheet to calculate various information on its individual plants, a portion of which is presented below. 1 2 3 4 5 6 7 8

A Selling price/unit Variable cost/unit Fixed costs Breakeven volume Actual volume Operating income

B C Plant V Plant W 62 75 57 43 50,000 200,000 10,000 6,250 12,000 7,000 10,000 24,000

The cell with an incorrect formula is a. B8. b. C6. c. C7. d. D8. Page 69 © 2008 Institute of Certified Management Accountants

D Plant X 38 22 150,000 9,375 10,000 20,000


The following spreadsheet has been developed to display quarterly data for ABC Company. A 1 2 3 4 5 6 7 8

B C D E The ABC Company - Statement of Income Jan. Feb. Mar. 1st Qtr.

Sales Cost of Sales Gross profit General & admin. expense Selling expense Net profit before taxes

A correct formula for Cell E3 is a. b. c. d. 191.

=SUM(A3:E3). B3+C3+D3. =SUM(B3:D3). =B3+C3+D3/3.

The following spreadsheet has been developed to display quarterly data for ABC Company. A 1 2 3 4 5 6 7 8 9 10

B C D E The ABC Company - Statement of Income Jan. Feb. Mar. 1st Qtr.

Sales Cost of sales Gross profit General & admin. expense Selling expense Income before taxes Taxes @ 40% Net income

The formula to calculate January net income can be expressed as a. b. c. d.

+(B3-B4-B6-B7)*.4. =(B3-B4-B6-B7)*(1-.4). =B3-B4-B6-B7*.6. =(B5-B6-B7)*(1-.6).



Hanson Industries has developed a spreadsheet to calculate the operating income from its two products, a portion of which is shown below. 1 2 3 4 5 6 7

A

B Prod G 5,000 75 45

Unit sales Selling price/unit Variable cost/unit Fixed costs Operating income

C Prod H 15,000 30 20

D Total

200,000

Which one of the following represents a correct formula for Cell D7? a. b. c. d. 193.

(B3*(B4-B5)) + (C3*(C4-C5)) -D6. (B3*B4) + (C3*C4) -D6. (B3+C3) * (B4-B5) - (C4-C5) -D6. (D3*D4) - (D3*D5) -D6.

A portion of a spreadsheet for a cash flow forecast for Harrison Products is shown below. Harrison collects 20% of its sales in the month of the sale, 50% the following month, and 30% the second month after the sale. Purchases are paid for the month following the purchase and wages are paid in the current month. 1 2 3 4 5 6 7

A Begin cash balance Sales Purchases Wages Ending cash balance

B Aug 30 300 125 125 15

C Sept 15 350 175 150 50

D Oct 50 400 200 150

Which one of the following represents a correct formula for Cell D7? a. b. c. d.

D3 + (B4*.2) + (C4*.5) + (D4*.3) - C5 - D6. C7 + (B4*.3) + (C4*.5) + (D4*.2) - D5 - C6. D3 + D4 - D6 - D8. C7 + (B4*.3) + (C4*.5) + (D4*.2) - C5 - D6.


E Nov 380 180 160

F Dec 340 170 140


A portion of a spreadsheet for a capital budgeting analysis is shown below. 1 2 3 4 5 6 7 8 9

A Investment Revenue Cash Operating Costs Tax Depreciation Tax Rate

B Time 0 (1,000,000)

36%

C Year 1 600,000 350,000 200,000 36%

D Year 2 700,000 400,000 200,000 36%

Net Cash Flow

Which one of the following is a correct formula for Cell C9? a. b. c. d. 195.

Intranets have which one of the following distinguishing security characteristics? a. b. c. d.

196.

(C4*C7) - (C5*C7) + (C6*C7). ((C4-C5) * (1-C7)) + C6. (C4-C5-C6) * (1-C7). C4 - C5 - [(C4 - C5 - C6) * C7)].

Firewalls. Web browsers. HTML databases. TCP/IP network protocols.

General Hospital has several out-patient clinics taking X-rays for patients in their respective areas. Instead of employing a radiologist at each location, the clinics send the X-rays to the hospital’s radiologist via the hospital Intranet. General Hospital is considering a proposal to allow another hospital in the area, Central Hospital, to access the Intranet next year. Which one of the following statements in regard to General Hospital’s use of computer technology is not correct? a. b. c. d.

General Hospital has an internal network (that connects to the main Internet) which can be navigated with the browser software, but is closed off to the general public. General Hospital will have to create an Extranet to connect its Intranet to that of Central Hospital. Although the Internet or a value-added networks (VANs) can be used to connect the two hospitals forming the Extranet, the Internet is more secure and reliable than the VAN. To improve reliability and security, a virtual private network (VPN) can be built.



E-commerce portals create marketplaces that facilitate all of the following activities except a. b. c. d.

198.

Data mining helps financial managers do all of the following functions except a. b. c. d.

199.

capacity management. key transformation. pattern processing. data modeling.

Which one of the following statements about a data warehouse is least accurate? a.

Data are accessible via query and analysis tools that are used for data mining.

b. c.

A data warehouse is a relational or multi-dimensional database. A data warehouse may consume hundreds of gigabytes or even terabytes of disk storage. A data warehouse is the necessary result of an Enterprise Resource Planning System (ERP) implementation.

d.

201.

identify trends. handle sales orders. highlight buying patterns. reveal customer tendencies.

A management accountant would be most concerned with the ability to use a data warehouse to perform a. b. c. d.

200.

warehousing data. selling at negotiated prices. shopping from electronic catalogs. bidding for the business of a buyer.

In which one of the following systems is a data warehouse least likely to be a critical element to the system process? a. b. c. d.

Decision support systems. Executive information systems. Expert systems. On-line analytical processing systems.



A data warehouse can be described as a a. b.

database that supports a particular functional area in an organization. collection of databases that are dispersed to corporate intranets, extranets and the internet.

c.

database that is available on the internet or provided by commercial information services. centralized and integrated database of current and historical data about an organization.

d.

203.

Structured Query Language (SQL) is the de facto standard query tool to retrieve information from a. b. c. d.

client/server systems. relational database systems. intranet systems. legacy systems.

Section D: Performance Measurement 204.

Consider the following categories of performance measures. I. II. III. IV.

Profitability measures. Customer-satisfaction measures. Efficiency, quality, and time measures. Innovation measures.

A cruise line operates on a national scale in a very competitive marketplace. In view of this information, which measures should the company use in the evaluation of its managers? a. b. c. d.

I only. I and II. II and III. I, II, III, and IV.



Brennan Company evaluates the company’s managers using management by objectives (MBO). All of the following are considered appropriate goals for measuring a division manager’s efficiency for a budgeting period except a. b. c. d.

206.

David Burke is manager of claims processing for Continental Health Care System. His performance is evaluated using various measures agreed upon in advance with Diane Lewis, general manager. Lewis asked Burke to recommend several measures to evaluate the performance of his unit next year. Which one of the following performance measures would likely have the least positive effect on Burke’s motivation and performance? a. b. c. d.

207.

Processing cost per claim. Average processing time per claim. Percentage of claims processed accurately the first time. Total dollar amount of claims processed per month.

Of the following pairs of variances found in a flexible budget report, which pair is most likely to be related? a. b. c. d.

208.

budgeted operating income. a targeted share of the market. earnings per share projections. a reduction in the organizational structure (fewer employees doing a given amount of work.

Material price variance and variable overhead efficiency variance. Labor rate variance and variable overhead efficiency variance. Material usage variance and labor efficiency variance. Labor efficiency variance and fixed overhead volume variance.

Paul Cooper, shipping manager for DFG Distributors, is responsible for managing the staff and all related transportation equipment to fill orders for bakery products from local retailers and deliver the products to those retailers. Which one of the following groups of three performance measures most likely would result in the highest level of goal congruence? a. b. c. d.

Labor cost per order; transportation cost per order; number of orders completed per day. The percentage of orders filled on time; the percentage of orders filled accurately; average cost to fill and deliver an order. Customer satisfaction; elapsed time to complete an order; percentage of orders filled accurately. Orders completed per employee per day; employee injuries per hour worked; number of vehicle accidents per year. Page 75 © 2008 Institute of Certified Management Accountants


To insure that a divisional vice president places appropriate focus on both the short-term and the long-term objectives of the division, the best approach would be to evaluate the vice president’s performance by using a. b. c. d.

210.

P.C. Programs Inc. produces software for individual users and small businesses. Rita Morgan manages the customer hot line department for the firm and is responsible for answering customer questions related to software products produced by all divisions of the firm. For purposes of promoting goal congruence, which one of the following would be the least appropriate measure of her performance? a. b. c. d.

211.

Average time to provide an answer or solution to a customer. Number of calls to the hot line for each new release of software. Average time a customer is on hold. Number of customer complaints due to incorrect responses given to customers.

In inventory management, goal congruence between the economic order quantity (EOQ) model and the manufacturing manager’s own preference for reduced inventory levels can be more easily achieved if the firm a. b. c. d.

212.

return on investment (ROI) which permits easy and quick comparisons to other similar divisions. residual income since it will eliminate the rejection of capital investments that have a return less than ROI but greater than the cost of capital. division segment margin or profit margin. financial and nonfinancial measures, including the evaluation of quality, customer satisfaction, and market performance.

chooses not to charge a carrying cost for inventory. imposes a capital charge on funds tied up in inventory. orders greater quantities than the EOQ model would suggest. measures the manager’s performance based on the number of orders placed for inventory.

A company applies variable overhead based upon direct labor hours and has a variable overhead efficiency variance that is $25,000 favorable. A possible cause of this variance is that a. b. c. d.

higher skilled labor was used. electricity rates were lower than expected. less supplies were used than anticipated. less units of finished goods were produced. Page 76 © 2008 Institute of Certified Management Accountants


The production manager of the Super T-shirt Company is responsible for the activity of her department and the costs associated with production. Super T adheres to a responsibility centered budget process, and the manager’s performance is measured by how well she performs to budget. Recently, the dark horse team won the local college basketball tournament. As a result, the sales department, which operates as a profit center, received an order for 10,000 t-shirts, but only if they could be delivered in three days. The production manager said she could meet the schedule, but only by incurring overtime pay that would cause her to be over budget for hourly wages paid. What would be the best course of action for the sales department and the production manager to undertake in this case? a. b. c. d.

214.

Which one of the following should be used for evaluating the performance of the Repair and Maintenance Department that repairs production equipment in a firm devoted to making keyboards for computers? a. b. c. d.

215.

Accept the order and overrun the production manager’s budget. Refuse the overtime and produce only what the production department is capable of while staying within the budget. Accept the order and ignore the effect on the production department budget when conducting the performance review. Charge the overtime to the sales department’s budget.

The variance between the firm’s budgeted and actual net income. The total factory overhead variances. The fixed overhead volume variances. The response time and degree of satisfaction among the production departments.

Underwood Corporation uses the following format to present performance results to the production managers. Month’s Month’s Price Quantity Actual Budget Variance Variance Direct materials $10,000 $12,000 $1,000F $1,000F Direct labor 20,000 19,500 500F 1,000U Variable overhead 4,000 4,000 100U 100F Fixed overhead 12,000 12,200 200F Sales units 50,000 52,000 This format may be confusing to the production manager because a. b. c. d.

year-to-date information is not shown. a fixed overhead volume variance is not shown. more detail of variable overhead items should be included. the report includes variances beyond the control and knowledge of the production manager. Page 77 © 2008 Institute of Certified Management Accountants


A company has a raw material price variance that is unfavorable. An analysis of this variance indicates that the company’s only available supplier of one of its raw materials unexpectedly raised the price of the material. The action management should take regarding this situation should be to a. b. c. d.

217.

Albert Hathaway recently joined Brannen University as the chief information officer of the University Computing Services Department. His assigned task is to help reduce the recurrent problem of cost overruns due to uncontrolled computer usage by the user community, while at the same time not curtailing the use of information technology for research and teaching. To ensure goal congruence, which one of the following algorithms should be used to allocate the cost of the University Computing Services Department to other departments within the university? a. b. c. d.

218.

negatively evaluate the performance of the purchasing manager. negatively evaluate the performance of the production manager. change the raw material price standard. ask the production manager to lower the material usage standard to compensate for higher material costs.

Actual rate times actual hours of computer usage. Actual rate times budgeted hours of computer usage. Budgeted rate times actual hours of computer usage. Budgeted rate times budgeted hours of computer usage.

The following information is from the accounting records of St. Charles Enterprises. Static Budget Actual Sales volume (units) 82,000 75,000 Selling price/unit Variable cost/unit Fixed cost

$ 15.00 9.00 280,000

$ 15.00 9.25 285,000

A staff assistant performed a comparison of budget and actual data, and calculated an unfavorable operating income variance of $65,750. The assistant concluded that performance did not meet expectations because there was an unfavorable variance in operating income. Which one of the following is the best evaluation of this preliminary conclusion? a. b. c. d.

Both the conclusion and the variance calculation are correct. The conclusion is incorrect, but the variance calculation is informative. The conclusion is correct, but the variance calculation could be more informative. Both the conclusion and the variance calculation are incorrect. Page 78 © 2008 Institute of Certified Management Accountants


For a given time period, a company had a favorable material quantity variance, a favorable direct labor efficiency variance, and a favorable fixed overhead volume variance. Of the following, the one factor that could not have caused all three variances is a. b. c. d.

220.

the purchase of higher quality materials. the use of lower-skilled workers. the purchase of more efficient machinery. an increase in production supervision.

Marten Company has a cost-benefit policy to investigate any variance that is greater than $1,000 or 10% of budget, whichever is larger. Actual results for the previous month indicate the following. Raw material Direct labor

Budget $100,000 50,000

Actual $89,000 54,000

The company should investigate a. b. c. d. 221.

A company has a direct labor price variance that is favorable. Of the following, the most serious concern the company may have about this variance is that a. b. c. d.

222.

neither the material variance nor the labor variance. the material variance only. the labor variance only. both the material variance and the labor variance.

the circumstances giving rise to the favorable variance will not continue in the future. the production manager may not be using human resources as efficiently as possible. the cause of the favorable variance may result in other larger unfavorable variances in the value-chain. actual production is less than budgeted production.

An advantage of using a flexible budget compared to a static budget is that in a flexible budget a. b. c. d.

shortfalls in planned production are clearly presented. standards can easily be changed to adjust to changing circumstances. fixed cost variances are more clearly presented. budgeted costs for a given output level can be compared with actual costs for the same level of output. Page 79 © 2008 Institute of Certified Management Accountants


A major disadvantage of a static budget is that a. b. c. d.

224.

Arkin Co.’s controller has prepared a flexible budget for the year just ended, adjusting the original static budget for the unexpected large increase in the volume of sales. Arkin’s costs are mostly variable. The controller is pleased to note that both actual revenues and actual costs approximated amounts shown on the flexible budget. If actual revenues and actual costs are compared with amounts shown on the original (static) budget, what variances would arise? a. b. c. d.

225.

Both revenue variances and cost variances would be favorable. Revenue variances would be favorable and cost variances would be unfavorable. Revenue variances would be unfavorable and cost variances would be favorable. Both revenue variances and cost variances would be unfavorable.

Which one of the following statements is correct concerning a flexible budget cost formula? Variable costs are stated a. b. c. d.

226.

it is more difficult to develop than a flexible budget. it is made for only one level of activity. variances tend to be smaller than when flexible budgeting is used. variances are more difficult to compute than when flexible budgeting is used.

per unit and fixed costs are stated in total. in total and fixed costs are stated per unit. in total and fixed costs are stated in total. per unit and fixed costs are stated per unit.

The monthly sales volume of Shugart Corporation varies from 7,000 units to 9,800 units over the course of a year. Management is currently studying anticipated selling expenses along with the related cash resources that will be needed. Which of the following types of budgets (1) should be used by Shugart in planning, and (2) will provide Shugart the best feedback in performance reports for comparing planned expenditures with actual amounts? a. b. c. d.

Planning Static Static Flexible Flexible

Performance Reporting Static. Flexible. Static. Flexible.



Management desires to gain additional insight into the firm’s sales quantity variance. To accomplish this, the sales quantity variance should be subdivided into the a. b. c. d.

228.

flexible budget variance and sales mix variance. market share variance and market size variance. sales mix variance, market share variance, and market size variance. sales mix variance and market share variance.

The following performance report was prepared for Dale Manufacturing for the month of April. Sales units Sales dollars Variable costs Fixed costs Operating income

Actual Results 100,000

Static Budget 80,000

Variance 20,000F

$190,000 125,000 45,000 $ 20,000

$160,000 96,000 40,000 $ 24,000

$30,000F 29,000U 5,000U $ 4,000U

Using a flexible budget, Dale’s total sales-volume variance is a. b. c. d. 229.

The benefits of management by exception reporting include all of the following except a reduction in a. b. c. d.

230.

$4,000 unfavorable. $6,000 favorable. $16,000 favorable. $20,000 unfavorable.

reports production costs. information overload. reliance on advance planning. unfocused management actions.

Use of a standard cost system can include all of the following advantages except that it a. b. c. d.

assists in performance evaluation. emphasizes qualitative characteristics. permits development of flexible budgeting. allows employees to better understand what is expected of them.



Teeny Toddlers is a four-year old manufacturer of colorful, plastic toddler riding toys. To maintain competitive prices, control of costs is critical. Management has considered moving production overseas, but so far they are committed to remaining in the U.S. Management has decided to permit their employees to participate in setting up a new standard cost system. Management likely expects the new standard cost system, along with the employee input, to provide all of the following benefits except that a. b. c. d.

232.

Which one of the following will allow a better use of standard costs and variance analysis to help improve managerial decision-making? a. b. c. d.

233.

Set standards with the help of line personnel directly involved in the process. Do not differentiate between variable and fixed overhead in calculating overhead variances. Use standard costs only for inventory valuation. Use the prior year’s average actual cost as the current year’s standard.

MinnOil performs oil changes and other minor maintenance services (e.g., tire pressure checks) for cars. The company advertises that all services are completed within 15 minutes for each service. On a recent Saturday, 160 cars were serviced resulting in the following labor variances: rate, $19 unfavorable; efficiency, $14 favorable. If MinnOil’s standard labor rate is $7 per hour, determine the actual wage rate per hour and the actual hours worked. a. b. c. d.

234.

unfavorable variances are more likely to occur. employees who participate in setting standards may be more efficient. standard costs will help management in uncovering potential cost problems. standard costing permits management by exception, which should save some time.

Wage Rate $6.55 $6.67 $7.45 $7.50

Hours Worked 42.00. 42.71. 42.00. 38.00.

Frisco Company recently purchased 108,000 units of raw material for $583,200. Three units of raw materials are budgeted for use in each finished good manufactured, with the raw material standard set at $16.50 for each completed product. Frisco manufactured 32,700 finished units during the period just ended and used 99,200 units of raw material. If management is concerned about the timely reporting of variances in an effort to Page 82 © 2008 Institute of Certified Management Accountants

CMA Exam Retired Questions improve cost control and bottom-line performance, the materials purchase price variance should be reported as a. b. c. d. 235.

$6,050 unfavorable. $9,920 favorable. $10,800 unfavorable. $10,800 favorable.

Christopher Akers is the chief executive officer of SBL Inc., a masonry contractor. The financial statements have just arrived showing a $3,000 loss on the new stadium job that was budgeted to show a $6,000 profit. Actual and budget information relating to the materials for the job are as follows. Actual 3,000 $7.90

Bricks - number of bundles Bricks - cost per bundle

Budget 2,850 $8.00

Which one of the following is a correct statement regarding the stadium job for SBL? a. b. c. d. 236.

The price variance was favorable by $285. The price variance was favorable by $300. The efficiency variance was unfavorable by $1,185. The flexible budget variance was unfavorable by $900.

A company isolates its raw material price variance in order to provide the earliest possible information to the manager responsible for the variance. The budgeted amount of material usage for the year was computed as follows. 150,000 units of finished goods x 3 pounds/unit x $2.00/pound = $900,000. Actual results for the year were the following. Finished goods produced Raw materials purchased Raw materials used Cost per pound

160,000 units 500,000 pounds 490,000 pounds $2.02

The raw material price variance for the year was a. b. c. d.

$9,600 unfavorable. $9,800 unfavorable. $10,000 unfavorable. $20,000 unfavorable. Page 83 © 2008 Institute of Certified Management Accountants


Lee Manufacturing uses a standard cost system with overhead applied based on direct labor hours. The manufacturing budget for the production of 5,000 units for the month of May included the following information. Direct labor (10,000 hours at $15 per hour) Variable overhead Fixed overhead

$150,000 30,000 80,000

During May, 6,000 units were produced and the direct labor efficiency variance was $1,500 unfavorable. Based on this information, the actual number of direct labor hours used in May was a. b. c. d. 238.

9,900 hours. 10,100 hours. 11,900 hours. 12,100 hours.

At the beginning of the year, Douglas Company prepared the following monthly budget for direct materials. Units produced and sold

10,000

15,000

Direct material

$15,000

$22,500

At the end of the month, the company's records showed that 12,000 units were produced and sold and $20,000 was spent for direct materials. The variance for direct materials is a. b. c. d. 239.

$2,000 favorable. $2,000 unfavorable. $5,000 favorable. $5,000 unfavorable.

Randall Company uses standard costing and flexible budgeting and is evaluating its direct labor. The total budget variance can usually be broken down into two other variances identified as the a. b. c. d.

direct labor rate variance and direct labor efficiency variance. direct labor cost variance and the direct labor volume variance. direct labor rate variance and direct labor volume variance. direct labor cost variance and direct labor efficiency variance.



Brannen Videotronics uses a four-way allocation of overhead, machine hours to allocate overhead, and years of experience as the main determinant for wage increases. The standards are set and revised on an annual basis. Due to a surge in competitive pressures, Brannen’s management decided to undertake downsizing. Brannen offered incentives that permitted a large number of senior employees to opt in the middle of the year for early retirement. As a result, Brannen had to bring in temporary replacements who were paid entry-level wages to see that work deadlines were met. Which one of the following is most likely to result from this situation? a. b. c. d.

241.

Richter Company has an unfavorable materials efficiency (usage) variance for a particular month. Which one of the following is least likely to be the cause of this variance? a. b. c. d.

242.

Inadequate training of the direct labor employees. Poor performance of the shipping employees. Poor design of the production process or product. Poor quality of the raw materials.

A company had a total labor variance of $15,000 favorable and a labor efficiency variance of $18,000 unfavorable. The labor price variance was a. b. c. d.

243.

Unfavorable efficiency variances and favorable price variances. Unfavorable efficiency variances and unfavorable price variances. Favorable efficiency variances and unfavorable price variances. Favorable efficiency variances and favorable price variances.

$3,000 favorable. $3,000 unfavorable. $33,000 favorable. $33,000 unfavorable.

Lee manufacturing uses a standard cost system with overhead applied based on direct labor hours. The manufacturing budget for the production of 5,000 units for the month of June included 10,000 hours of direct labor at $15 per hour, $150,000. During June, 4,500 units were produced, using 9,600 direct labor hours, incurring $39,360 of variable overhead, and showing a variable overhead efficiency variance of $2,400 unfavorable. The standard variable overhead rate per direct labor hour was a. $3.85. b. $4.00. c. $4.10. d. $6.00. Page 85 © 2008 Institute of Certified Management Accountants


Cordell Company uses a standard cost system. On January 1 of the current year, Cordell budgeted fixed manufacturing overhead cost of $600,000 and production at 200,000 units. During the year, the firm produced 190,000 units and incurred fixed manufacturing overhead of $595,000. The production volume variance for the year was a. b. c. d.

245.

Highlight Inc. uses a standard cost system and applies factory overhead to products on the basis of direct labor hours. If the firm recently reported a favorable direct labor efficiency variance, then the a. b. c. d.

246.

$5,000 unfavorable. $10,000 unfavorable. $25,000 unfavorable. $30,000 unfavorable.

variable overhead spending variance must be favorable. variable overhead efficiency variance must be favorable. fixed overhead volume variance must be unfavorable. direct labor rate variance must be unfavorable.

Harper Company’s performance report indicated the following information for the past month. Actual total overhead Budgeted fixed overhead Applied fixed overhead at $3 per labor hour Applied variable overhead at $.50 per labor hour Actual labor hours

$1,600,000 1,500,000 1,200,000 200,000 430,000

Harper’s total overhead spending variance for the month was a. b. c. d 247.

$100,000 favorable. $115,000 favorable. $185,000 unfavorable. $200,000 unfavorable.

The JoyT Company manufactures Maxi Dolls for sale in toy stores. In planning for this year, JoyT estimated variable factory overhead of $600,000 and fixed factory overhead of $400,000. JoyT uses a standard costing system, and factory overhead is allocated to units produced on the basis of standard direct labor hours. The denominator level of activity budgeted for this year was 10,000 direct labor hours, and JoyT used 10,300 actual direct labor hours. Page 86 © 2008 Institute of Certified Management Accountants

CMA Exam Retired Questions Based on the output accomplished during this year, 9,900 standard direct labor hours should have been used. Actual variable factory overhead was $596,000, and actual fixed factory overhead was $410,000 for the year. Based on this information, the variable overhead spending variance for JoyT for this year was a. b. c. d. 248.

A company has a fixed overhead volume variance that is $10,000 unfavorable. The most likely cause for this variance is that a. b. c. d.

249.

the production supervisory salaries were greater than planned. the production supervisory salaries were less than planned. more was produced than planned. less was produced than planned.

When using a flexible budgeting system, the computation for the variable overhead spending variance is the difference between a. b. c. d.

250.

$24,000 unfavorable. $2,000 unfavorable. $4,000 favorable. $22,000 favorable.

actual variable overhead and the previously budgeted amount. the previously budgeted amount and actual inputs times the budgeted rate. the amount applied to work-in-process and actual variable overhead. actual variable overhead and actual inputs times the budgeted rate.

Recently Fan Club Inc. submitted a budget for the coming year to management. Included in the budget were the plans for a new product, a rechargeable fan. The new fan will not only last longer than the competitor’s product but is also more quiet. While not yet approved, the budget called for aggressive advertising to support its sales targets, as the business community was not yet aware that Fan Club was close to production of a new fan. A member of the management accounting staff “shared” the budget with a distributor. In accordance with IMA’s “Statement of Ethical Professional Practice,” which one of the following would best represent an ethical conflict in this situation? a. b. c. d.

The budget has not been approved and therefore is not for publication. The price has not been established, so expectations must be managed. The staff member exposed the company to a potential lawsuit. The employee should refrain from disclosing confidential information.



Fortune Corporation’s Marketing Department recently accepted a rush order for a nonstock item from a valued customer. The Marketing Department filed the necessary paperwork with the Production Department, which complained greatly about the lack of time to do the job the right way. Nevertheless, the Production Department accepted the manufacturing commitment and filed the required paperwork with the Purchasing Department for the needed raw materials. A purchasing clerk temporarily misplaced the paperwork. By the time the paperwork was found, it was too late to order from the company’s regular supplier. A new supplier was located, and that vendor quoted a very attractive price. The materials arrived and were rushed into production, bypassing the normal inspection processes (as directed by the Production Department supervisor) to make up for lost time. Unfortunately, the goods were of low quality and created considerable difficulty for Fortune’s assembly-line personnel. Which of the following best indicates the responsibility for the materials usage variance in this situation? a. b. c. d.

252.

Purchasing. Purchasing and Marketing. Marketing and Production. Purchasing, Marketing, and Production.

The accounting records of Foster Corporation reveal a favorable labor efficiency variance for the period just ended. Which of the following comments by Foster’s executives reflect a limited knowledge of the variance investigation process? 1. 2. 3. 4. 5. a. b. c. d.

“We can use statistical testing procedures to determine whether or not the variance should be investigated.” “Let’s look into it. Yes, our operations might be fine; however, our standard labor time may need revision.” “I don’t believe in all of these rules to decide whether or not variances should be investigated. Good judgment is the real key.” “Don’t worry - the variance was caused by a random event and is well within our range of possible acceptable outcomes.” “Why are you getting so upset? This is a favorable variance, so let’s forget it.” 2 and 5 only. 1, 3, and 4 only. 4 and 5 only. 5 only.



Johnson Inc. has established per unit standards for material and labor for its production department based on 900 units normal production capacity as shown below. 3 lbs. of direct materials @ $4 per lb. 1 direct labor hour @ $15 per hour Standard cost per unit

$12 15 $27

During the year 1,000 units were produced. The accounting department has charged the production department supervisor with the following unfavorable variances. Materials Quantity Variance Actual usage 3,300 lbs. Standard usage 3,000 lbs. Unfavorable 300 lbs.

Material Price Variance Actual cost $4,200 Standard cost 4,000 Unfavorable $200

Bob Sterling, the production supervisor, has received a memorandum from his boss stating that he did not meet the established standards for material prices and quantity and corrective action should be taken. Sterling is very unhappy about the situation and is preparing to reply to the memorandum explaining the reasons for his dissatisfaction. All of the following are valid reasons for Sterling’s dissatisfaction except that the a. b. c. d. 254.

Howard Company produces and sells replacement parts for cotton processing equipment. Which one of the following cost variances are least likely to be controllable by Howard’s production manager? a. b. c. d.

255.

material price variance is the responsibility of the purchasing department. cause of the unfavorable material usage variance was the acquisition of substandard material. standards have not been adjusted to the engineering changes. variance calculations fail to properly reflect that actual production exceeded normal production capacity.

Variable overhead spending variance. Labor efficiency variance. Material quantity variance. Fixed overhead production volume variance.

During the month of May, Tyler Company experienced a significant unfavorable material efficiency variance in the production of its single product at one of Tyler’s plants. Which one of the following reasons would be least likely to explain why the unfavorable variance arose? a. b. c. d.

Inferior materials were purchased. Actual production was lower than planned production. Workers used were less-skilled than expected. Replacement production equipment had just been installed. Page 89 © 2008 Institute of Certified Management Accountants


Sara Bellows, manager of the telecommunication sales team, has the following department budget. Billings - long distance Billings - phone card Billings - toll free

$350,000 75,000 265,000

Her responsibility center is best described as a a. b. c. d. 257.

cost center. revenue center. profit center. investment center.

Performance results for four geographic divisions of a manufacturing company are shown below. Division A B C D

Target Return on Investment 18% 16 14 12

Actual Return on Investment 18.1% 20.0 15.8 11.0

Return on Sales 8% 8 6 9

The division with the best performance is a. b. c. d. 258.

Division A. Division B. Division C. Division D.

Most firms allocate corporate and other support costs to divisions and departments for all of the following reasons except to a. b. c. d.

remind profit-center managers that earnings must be adequate to cover some share of the indirect costs. stimulate profit-center managers to put pressure on central managers to control service costs. create competition between divisions and departments, and their managers. fix accountability and evaluate profit centers.



Which one of the following allocation approaches will ensure that the production departments do not underestimate their planned usage of service at the start of the budget period as well as make the service departments cost efficient? a. b. c. d.

260.

Vincent Hospital has installed a new computer system. The system was designed and constructed based on the anticipated number of hours of usage required by the various hospital departments according to projections made by the departmental managers. Virtually all of the operating costs of the system are fixed. What would be the most systematic and rational manner in which to allocate the new computer system costs to the various hospital departments? a. b. c. d.

261.

To each department equally. By the anticipated number of hours of usage. By actual usage by each department. By the revenue generated in each department.

Which one of the following is an incorrect description of transfer pricing? a. b. c. d.

262.

The use of actual rates and actual hours for both fixed and variable costs. Budgeted rates and standard hours allowed for output attained for variable costs and budgeted rates and capacity available for fixed costs. The use of rates and quantities based on long-term historical averages for both variable and fixed costs. The use of a budgeted lump-sum amount based on estimates provided by the production departments for both variable and fixed costs.

It measures the value of goods or services furnished by a profit center to other responsibility centers within a company. If a market price exists, this price may be used as a transfer price. It measures exchanges between a company and external customers. If no market price exists, the transfer price may be based on cost.

Manhattan Corporation has several divisions that operate as decentralized profit centers. At the present time, the Fabrication Division has excess capacity of 5,000 units with respect to the UT-371 circuit board, a popular item in many digital applications. Information about the circuit board follows. Market price Variable selling/distribution costs on external sales Variable manufacturing cost Fixed manufacturing cost


$48 5 21 10

CMA Exam Retired Questions Manhattan’s Electronic Assembly Division wants to purchase 4,500 circuit boards either internally, or else use a similar board in the marketplace that sells for $46. The Electronic Assembly Division’s management feels that if the first alternative is pursued, a price concession is justified, given that both divisions are part of the same firm. The best process to determine the price ultimately charged by the Fabrication Division to the Assembly Division for the circuit board is to a. b. c. d.

263.

Happy Time Industries uses segment reporting for all of its decentralized divisions. It has several products that are transferred from one division to other divisions. Happy Time wants to motivate the manager of the selling division to produce efficiently. Assuming the following methods are available, the optimal transfer pricing method should be a a. b. c. d.

264.

cost-based transfer price that uses actual amounts. cost-based transfer price that uses budgeted amounts. variable cost-based transfer price that uses actual amounts. market-based transfer price.

Morrison's Plastics Division, a profit center, sells its products to external customers as well as to other internal profit centers. Which one of the following circumstances would justify the Plastics Division selling a product internally to another profit center at a price that is below the market-based transfer price? a. b. c. d.

265.

establish the price by top management. establish the price by an arbitration committee. establish the price through negotiations between the Fabrication’s and Electronic Assembly’s Division management. set the price equal to the price that would be charged if the Fabrication Department had no excess capacity.

The buying unit has excess capacity. The selling unit is operating at full capacity. Routine sales commissions and collection costs would be avoided. The profit centers' managers are evaluated on the basis of unit operating income.

With respect to a firm’s transfer pricing policy, an advantage of using a dual pricing arrangement is that it a. b. c. d.

provides an incentive for the supplying subunit to control costs. exposes the supplying subunit to the discipline of market prices. promotes goal congruence between the supplying and buying subunits of the firm. simplifies tax calculations when the buying and supplying subunits are taxed in different jurisdictions. Page 92 © 2008 Institute of Certified Management Accountants


266.

Manhattan Corporation has several divisions that operate as decentralized profit centers. At the present time, the Fabrication Division has excess capacity of 5,000 units with respect to the UT-371 circuit board, a popular item in many digital applications. Information about the circuit board follows. Market price Variable selling/distribution costs on external sales Variable manufacturing cost Fixed manufacturing cost

$48 5 21 10

Manhattan’s Electronic Assembly Division wants to purchase 4,500 circuit boards either internally, or else use a similar board in the marketplace that sells for $46. The Electronic Assembly Division’s management feels that if the first alternative is pursued, a price concession is justified, given that both divisions are part of the same firm. To optimize the overall goals of Manhattan, the minimum price to be charged for the board from the Fabrication Division to the Electronic Assembly Division should be a. b. c. d. 267.

Kern Manufacturing has several divisions and evaluates performance using segment income. Since sales include transfers to other divisions, Kern has established a price for internal sales as cost plus 10%. Red Division has requested 10,000 units of Green Division’s product. Green Division is selling its product externally at a 60% markup over cost. The corporate policy will encourage the Green Division to a. b. c. d.

268.

$21. $26. $31. $46.

transfer the product to the Red Division because all costs are being covered and the division will earn a 10% profit. reject the sale to the Red Division because it does not provide the same markup as external sales. accept the sale to the Red Division if it is operating at full capacity and the sale will contribute to fixed costs. transfer the product to the Red Division if it does not require the Green Division to give up any external sales.

For several years, Northern Division of Marino Company has maintained a positive residual income. Northern is currently considering investing in a new project that will lower the division’s overall return on investment (ROI) but increase its residual income. What is the relationship between the expected rate of return on the new project, the firm’s cost of capital, and the division’s current ROI? Page 93 © 2008 Institute of Certified Management Accountants


269.

The expected rate of return on the new project is higher than the division’s current return on investment, but lower than the firm’s cost of capital. The firm’s cost of capital is higher than the expected rate of return on the new project, but lower than the division’s current return on investment. The division’s current return on investment is higher than the expected rate of return on the new project, but lower than the firm’s cost of capital. The expected rate of return on the new project is higher than the firm’s cost of capital, but lower than the division’s current return on investment.

KHD Industries is a multidivisional firm that evaluates its managers based on the return on investment (ROI) earned by their divisions. The evaluation and compensation plans use a targeted ROI of 15% (equal to the cost of capital) and managers receive a bonus of 5% of basic compensation for every one-percentage point that the division's ROI exceeds 15%. David Evans, manager of the Consumer Products Division, has made a forecast of the division's operations and finances for next year that indicates the ROI would be 24%. In addition, new short-term programs were identified by the Consumer Products Division and evaluated by the finance staff as follows. Program A B C D

Projected ROI 13% 19% 22% 31%

Assuming no restrictions on expenditures, what is the optimal mix of new programs that would add value to KHD Industries? a. b. c. d. 270.

A,B,C, and D. B,C, and D only. C and D only. D only.

Oakmont Company has two divisions, Household Appliances and Construction Equipment. The manager of the Household Appliances Division is evaluated on the basis of return on investment (ROI). The manager of the Construction Equipment Division is evaluated on the basis of residual income. The cost of capital has been 12% and the return on investment has been 16% for the two divisions. Each manager is currently considering a project with a 14% rate of return. According to the current evaluation system for managers, which manager(s) would have incentive to undertake the project? a. b.

Both managers would have incentive to undertake the project. Neither manager would have incentive to undertake the project. Page 94 © 2008 Institute of Certified Management Accountants

CMA Exam Retired Questions c. d.

271.

A company is concerned that its divisional managers are not making decisions that are in the best interests of the overall corporation. In order to prevent this, the company should use a performance evaluation system that focuses on a. b. c. d.

272.

c. d.

residual income. residual income, with the required rate of return equal to the firm’s weightedaverage cost of capital. return on investment. return on investment, with the required rate of return equal to the firm’s weightedaverage cost of capital.

Economic Value Added (EVA) is a specific variation of which one of the following performance evaluation techniques? a. b. c. d.

274.

flexible budget variances. operating income. controllable costs. residual income.

Economic value added (EVA) could be described most accurately as a modification of a. b.

273.

The manager of the Household Appliances Division would have incentive to undertake the project while the manager of the Construction Equipment Division would not have incentive to undertake the project. The manager of the Construction Equipment Division would have incentive to undertake the project while the manager of the Household Appliances Division would not have incentive to undertake the project.

Return on investment. Residual income. Internal rate of return. Net present value method.

The following selected information is from the financial statements of Bishop Corporation for the last fiscal year. Current assets Fixed assets Current liabilities Long-term debt Shareholders' equity Operating profit

$ 500,000 250,000 100,000 300,000 350,000 1,000,000 Page 95


CMA Exam Retired Questions Income taxes Net income

400,000 600,000

Bishop has a cost of capital of 10%. The company's economic value added (EVA) for last year was a. b. c. d. 275.

The balanced scorecard provides an action plan for achieving competitive success by focusing management attention on critical success factors. Which one of the following is not one of the competitive success factors commonly focused upon in the balanced scorecard? a. b. c. d.

276.

Competitor business strategies. Financial performance measures. Internal business processes. Employee innovation and learning.

Which one of the following statements about a balanced scorecard is incorrect? a. b. c. d.

277.

$535,000. $570,000. $935,000. $970,000.

It seeks to address the problems associated with traditional financial measures used to assess performance. The notion of value chain analysis plays a major role in the drawing up of a balanced scorecard. It relies on the perception of the users with regard to service provided. It is directly derived from the scientific management theories.

A quality cost report prepared by Dominion Inc. reveals the following information. Prevention costs Appraisal costs Internal failure costs External failure costs Total quality costs

10% 15% 20% 55% 100%

Which one of the following should Dominion emphasize in order to most effectively improve its overall cost of quality performance? a. b. c. d.

Quality training. Inspections. Rework. Customer support. Page 96 © 2008 Institute of Certified Management Accountants


All of the following are methods used by businesses to identify problems with product quality except a. b. c. d.

279.

When measuring customer satisfaction in a cost of quality analysis, a major reason to include nonfinancial measures of customer satisfaction is that a. b. c. d.

280.

statistical process control charts. theory of constraints diagrams. Pareto (frequency) diagrams. cause-and-effect diagrams.

financial measures often are not reliable. nonfinancial measures are normally a part of the accounting process. financial measures do not indicate the specific areas that need improvement. nonfinancial measures are most useful without trend data.

Leese Inc. has the following quality financial data for its most recent fiscal year. Rework costs Warranty repair costs Product line inspection Design engineering Supplier evaluation Labor training Product testing Breakdown maintenance Product scrap Cost of returned goods Customer support Product liability claims

$110,000 280,000 95,000 300,000 240,000 150,000 65,000 70,000 195,000 180,000 35,000 80,000

The total amount of prevention costs that should be reported in a Cost of Quality report for the year is a. b. c. d. 281.

$390,000. $450,000. $690,000. $755,000.

When measuring the cost of quality, the cost of inspecting incoming raw materials is a(n) a. b. c. d.

prevention cost. appraisal cost. internal failure cost. external failure cost. Page 97 © 2008 Institute of Certified Management Accountants


In measuring the cost of quality, which one of the following is considered an appraisal cost? a. b. c. d.

283.

External failure costs include all of the following costs except those related to a. b. c. d.

284.

Rework cost. Product testing cost. Warranty claims cost. Equipment maintenance cost.

lost sales and lost customers. warranty obligations. product liability suits. product field testing.

When evaluating the cost of quality in an organization, which one of the following would be considered an internal failure cost? a. b. c. d.

The cost to rework defective units. The cost to inspect units produced. The warranty repair costs. Product testing.

Section E: External Financial Reporting 285.

According to the conceptual framework, the most basic objective of financial reporting is to convey information a. b. c. d.

286.

about the economic resources and obligations of a company. about the liquidity and solvency of a company. about the future cash flows of a company. that enables users to make decisions about a company.

All of the following support the objective of financial reporting , except providing information that a. b. c. d.

is useful for making investment and credit decisions. helps management evaluate alternative projects. concerns enterprise resources and claims to those resources. helps investors and creditors predict future cash flows. Page 98 © 2008 Institute of Certified Management Accountants


Neary Company has entered into a contract to lease computers from Baldwin Company starting on January 1. Relevant information pertaining to the lease is provided below. • • • • •

Lease term Useful life of computers Present value of future lease payments Fair value of leased asset on date of lease Baldwin’s implicit rate

4 Years 5 Years $100,000 105,000 10%

At the end of the lease term, ownership of the asset transfers from Baldwin to Neary. Neary has properly classified this lease as a capital lease on its financial statements, and uses straight-line depreciation on comparable assets. At January 1 the leased equipment would be reported on Neary’s books as a(n) a. b. c. d. 288.

asset only. asset and a liability. liability only. expense and a liability.

On January 1, Jennie Corporation purchased 30% of the common stock of Katlee Company for $500,000. The following information relates to Katlee at the date of acquisition. Cash Accounts receivable (net) Building (net) Land Liabilities

$ 50,000 250,000 700,000 100,000 100,000

Additional information relating to the purchase appears below. 1. 2. 3. 4. 5.

Jennie has the ability to exercise significant influence over Katlee. Both the book value and the fair value are the same for the receivables, land, and liabilities. The fair market value of the building is $900,000. Jennie depreciates its assets on a straight-line basis. Both tangible and intangible assets are amortized over 10 years. For the current year, Katlee had net income of $400,000 and declared and paid dividends of $100,000.

The amount of goodwill related to Jennie’s acquisition of Katlee at January 1 was a. b. c. d.

Zero. $60,000. $140,000. $200,000. Page 99 © 2008 Institute of Certified Management Accountants


A liability that represents the accumulated difference between the income tax expense reported on the firm’s books and the income tax actually paid is a. b. c. d.

290.

At the end of its first year in business, Pebbles Corporation reported pretax financial statement income of $50,000. Included in pretax income were $10,000 of revenue from installment sales and depreciation expense of $12,000. On the tax return, $5,000 of installment sales revenue was reported, and depreciation expense of $16,000 was deducted. The income tax rate was 40%. Pebbles reports installment sales receivables as current assets. On its year-end Statement of Financial Position, Pebbles should report deferred tax balances of a. b. c. d.

291.

capital gains tax. deferred taxes. taxes payable. value-added taxes.

$2,000 as a current liability and $1,600 as a current asset. $4,000 as a current asset and $5,000 as a noncurrent asset. $2,000 as a current liability and $1,600 as a noncurrent liability. $4,000 as a noncurrent liability and $5,000 as a current liability.

Lucas Company computed the following deferred tax balances for the two most recent years. Deferred tax assets are considered fully realizable. Current deferred tax assets Noncurrent deferred tax assets Current deferred tax liabilities Noncurrent deferred tax liabilities

Year 1 $3,000 6,000 8,000 5,000

Year 2 $10,000 7,000 9,000 14,000

What deferred tax amounts will appear on Lucas’s Statement of Financial Position at the end of Year 2?

a. b. c. d.

Assets Current Noncurrent $0 $1,000 $7,000 $1,000 $1,000 $0 $10,000 $7,000

Liabilities Current Noncurrent $5,000 $0. $1,000 $9,000. $0 $7,000. $9,000 $14,000.



Comparing the pension projected benefit obligation (PBO) and the accumulated postretirement benefit obligation (APBO) for benefits other than pensions, both a. b. c. d.

293.

reflect service costs in terms of future salary levels. are based on actual service performed up to the balance sheet date. represent the minimum liability to the company for pensions and benefits other than pensions. are used to compute the transition, the corridor, and the minimum liability.

Lucas Company computed the following deferred tax balances for the two most recent years. Deferred tax assets are considered fully realizable. Current deferred tax assets Noncurrent deferred tax assets Current deferred tax liabilities Noncurrent deferred tax liabilities

Year 1 $3,000 6,000 8,000 5,000

Year 2 $10,000 7,000 9,000 14,000

If Lucas calculates taxable income of $1,000,000 for Year 2 and is taxed at an effective income tax rate of 40%, how much income tax expense will be reported on Lucas Income Statement for Year 2? a. b. c. d. 294.

Harrison Corporation entered into a three-year contract, using the percentage-ofcompletion method for financial income and the completed contract method for taxable income. The effect on Harrison’s financial statements for the third year of this contract would be a(n) a. b. c. d.

295.

$400,000. $402,000. $404,000. $406,000.

decrease in the Deferred Tax Asset account. decrease in the Deferred Tax Liability account. increase in the Deferred Tax Asset account. increase in the Deferred Tax Liability account.

Selected financial information for Windham Inc. for the year just ended is shown below. Pretax income Interest received on municipal bonds Gain on the sale of land reported this year but not taxable until next year

$5,000,000 600,000 1,000,000


CMA Exam Retired Questions Tax rate for all years

40%

Beginning balances: Income taxes payable Deferred tax liability

-0$50,000

The total income tax expense reported on Windham’s Income Statement for the year just ended should be a. b. c. d. 296.

Keller Corporation signed a three-year lease for an automobile on December 1. The automobile had a list price of $17,000 and an estimated useful life of eight years. The lease called for payments of $500 per month for 36 months. The present value of the $500 payments was $15,054 at Keller’s incremental borrowing rate and $15,496 at the lessor’s implicit rate, which is known to the lessee. Based on the above information, Keller should record the lease as a(n) a. b. c. d.

297.

capital lease. operating lease. sale-leaseback. sales-type lease.

A tax rate other than the current tax rate may be used to calculate the deferred income tax amount on the statement of financial position if a(n) a. b. c. d.

298.

$960,000. $1,360,000. $1,760,000. $2,640,000.

future tax rate has been enacted into law. future tax rate change is considered more likely than not to occur. election has been made to apply past tax rates. net operating loss carryback exists.

Moore Corporation’s income tax computations gave rise to the following accounts. Deferred Tax Asset - Current Deferred Tax Asset - Noncurrent Deferred Tax Liability - Current Deferred Tax Liability - Noncurrent

$20,000 30,000 10,000 80,000

The account(s) relating to Moore’s taxes that should appear on the Statement of Financial Position is (are) Page 102 © 2008 Institute of Certified Management Accountants


299.

If a company uses off-balance-sheet financing, assets have been acquired a. b. c. d.

300.

for cash. with operating leases. with financing leases. with a line of credit.

Which one of the following statements with respect to leases is correct? a. b. c. d.

301.

a noncurrent Deferred Tax Liability of $40,000. a noncurrent Deferred Tax Liability of $90,000 and a noncurrent Deferred Tax Asset of $50,000. a current Deferred Tax Asset of $10,000 and a noncurrent Deferred Tax Liability of $50,000. a current Deferred Tax Asset of $20,000, a noncurrent Deferred Tax Asset of $30,000, a current Deferred Tax Liability of $10,000, and a noncurrent Deferred Tax Liability of $80,000.

An operating lease is treated like a rental contract between lessor and lessee. A lease that does not transfer ownership from the lessor to the lessee by the end of the lease is automatically an operating lease. Sales and direct financing leases pertain more to lessees than lessors. Unpredictability of lease revenues or expenses can transform what would otherwise be a capital lease for the lessee to an operating lease for the lessee.

Brown Industries operates a defined benefit pension plan. Information received from the actuary and the trustee related to the pension plan includes the following. Pension benefit obligation, January 1, Year 2 $1,889,000 Service cost 105,000 Interest cost 190,000 Retirement benefits paid 182,000 Employer contribution 155,000 Actual return on plan assets 215,000 Amortization of prior service cost 122,000 Amortization of SFAS 87 transition gain 12,500 Amortization of prior year unrecognized net pension loss 37,000 Fair value - pension plan assets, December 31, Year 1 1,825,000 The fair value of Brown’s plan assets at December 31, Year 2, is a. b. c. d.

$1,790,000. $1,798,000. $2,005,000. $2,013,000. Page 103 © 2008 Institute of Certified Management Accountants


Brown Industries operates a defined benefit pension plan. Information received from the actuary and the trustee related to the pension plan includes the following. Pension benefit obligation, January 1, Year 2 $1,889,000 Service cost 105,000 Interest cost 190,000 Retirement benefits paid 182,000 Employer contribution 155,000 Actual return on plan assets 215,000 Amortization of prior service cost 122,000 Amortization of SFAS 87 transition gain 12,500 Amortization of prior year unrecognized net pension loss 37,000 Fair value - pension plan assets, December 31, Year 1 1,825,000 Brown’s projected benefit obligation at December 31, Year 2, is a. b. c. d.

303.

$1,787,000. $1,969,000. $2,002,000. $2,029,000.

Brown Industries operates a defined benefit pension plan. Information received from the actuary and the trustee related to the pension plan includes the following. Pension benefit obligation, January 1 $1,889,000 Service cost 105,000 Interest cost 190,000 Retirement benefits paid 182,000 Employer contribution 155,000 Actual return on plan assets 215,000 Amortization of prior service cost 122,000 Amortization of SFAS 87 transition gain 12,500 Amortization of prior year unrecognized net pension loss 37,000 Fair value - pension plan assets, December 31 1,825,000 Based on the above information, Brown’s net periodic pension cost is a. b. c. d.

$177,500. $226,500. $237,500. $286,500.



The following information pertains to Maynard Corporation’s Income Statement for the twelve months just ended. The company has an effective income tax rate of 40%. Discontinued operations $(70,000) Extraordinary loss due to earthquake (90,000) Income from continuing operations (net of tax) 72,000 Cumulative effect of change in accounting principle 60,000 Maynard’s net income for the year is a. b. c. d.

305.

$36,000. $12,000. $(16,000). $(24,000).

Selected financial information for Jory Company for the current year ended December 31 is shown below. Plan assets at January 1 Projected benefit obligation at January 1 Accumulated benefit obligation at January 1 Interest cost Service cost Actual return on plan assets Expected return on plan assets Employer’s contribution Benefits paid to retirees Accrued pension cost at January 1

$6,000,000 5,000,000 4,000,000 400,000 700,000 500,000 500,000 800,000 300,000 -0-

Jory’s net pension expense for the year ended December 31 is a. b. c. d. 306.

$600,000. $900,000. $1,600,000. $1,900,000.

Selected financial information for Pelham Company for the current year ended December 31 is shown below. Plan assets at January 1 Projected benefit obligation at January 1 Accumulated benefit obligation at January 1 Interest cost Service cost Page 105 © 2008 Institute of Certified Management Accountants

$6,000,000 5,000,000 4,000,000 400,000 700,000

CMA Exam Retired Questions Actual return on plan assets Expected return on plan assets Employer’s contribution Benefits paid to retirees Accrued pension cost at January 1

500,000 500,000 800,000 300,000 -0-

The plan assets at December 31 for Pelham should be valued at a. b. c. d. 307.

On January 1, Rosewater Company leased a computer for four years at a monthly rent of $80, payable at the end of each month. Due to the rate of technical change, the computer is expected to become obsolete within five years. At the inception of the lease, the computer was retailing for $3,450. Had Rosewater chosen to purchase the computer instead of leasing it, they could have borrowed the funds at 10%. At a 10% interest rate, the present value of the lease payments is $3,154. Rosewater does not know the rate implicit in the lease. For the month of January, Rosewater should report (to the closest dollar) interest expense of a. b. c. d.

308.

$6,500,000. $6,800,000. $7,000,000. $7,300,000.

$26 and depreciation expense of $66. $0 and rent expense of $80. $29 and depreciation expense of $58. $29 and rent expense of $80.

Selected financial information for Liam Company for the current year ended December 31 is shown below. Plan assets at January 1 Projected benefit obligation at January 1 Accumulated benefit obligation at January 1 Interest cost Service cost Actual return on plan assets Expected return on plan assets Employer’s contribution Benefits paid to retirees Accrued pension cost at January 1 Liam’s projected benefit obligation at December 31 is a. b. c. d.


$6,000,000 5,000,000 4,000,000 400,000 700,000 500,000 500,000 800,000 300,000 -0-


Block Corporation wants to buy a new piece of machinery costing $1 million that is expected to last for 3 years. Block can finance this purchase with a 3-year, equal payment loan having an annual interest rate of 10%. Alternatively, Block can lease the equipment for $400,000 per year with payments due at the beginning of the year. Block is responsible for the maintenance under either choice and has a 40% tax rate. What is the after-tax present value of the lease payments? a. b. c. d.

310.

The financial statements included in the annual report to the shareholders are least useful to which one of the following? a. b. c. d.

311.

Stockbrokers. Bankers preparing to lend money. Competing businesses. Managers in charge of operating activities.

The statement of shareholders’ equity shows a a. b. c. d.

312.

$720,000. $656,640. $596,880. $437,760.

reconciliation of the beginning and ending balances in shareholders’ equity accounts. listing of all shareholders’ equity accounts and their corresponding dollar amounts. computation of the number of shares outstanding used for earnings per share calculations. reconciliation of the beginning and ending balances in the Retained Earnings account.

When using the statement of cash flows to evaluate a company’s continuing solvency, the most important factor to consider is the cash a. b. c. d.

balance at the end of the period. flows from (used for) operating activities. flows from (used for) investing activities. flows from (used for) financing activities.



A statement of financial position provides a basis for all of the following except a. b. c. d.

314.

The financial statement that provides a summary of the firm’s operations for a period of time is the a. b. c. d.

315.

expenses. shareholders’ equity. gains and losses. revenue.

Dividends paid to company shareholders would be shown on the statement of cash flows as a. b. c. d.

317.

income statement. statement of financial position. statement of shareholders’ equity. statement of retained earnings.

All of the following are defined as elements of an income statement in Statement of Financial Accounting Concepts No. 6, “Elements of Financial Statements,” except a. b. c. d.

316.

computing rates of return. evaluating capital structure. assessing liquidity and financial flexibility. determining profitability and assessing past performance.

operating cash inflows. operating cash outflows. cash flows from investing activities. cash flows from financing activities.

Long-term debt should be included in the current section of the statement of financial position if a. b. c. d.

it is to be converted into common stock before maturity. it matures within the year and will be retired through the use of current assets. management plans to refinance it within the year. a bond retirement fund has been set up for use in its scheduled retirement during the next year.



All of the following are classifications on the Statement of Cash Flows except a. b. c. d.

319.

The sale of available-for-sale securities should be accounted for on the statement of cash flows as a(n) a. b. c. d.

320.

Financing, investing, operating. Investing, financing, operating. Operating, financing, investing. Operating, investing, financing.

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) a. b. c. d.

322.

operating activity. investing activity. financing activity. noncash investing and financing activity.

A statement of cash flows prepared using the indirect method would have cash activities listed in which one of the following orders? a. b. c. d.

321.

operating activities. equity activities. investing activities. financing activities.

financing activity. investing activity. operating activity. noncash financing and investing activity.

On a statement of financial position, all of the following should be classified as current liabilities except a. b. c. d.

advances from customers for services to be performed. salaries payable for work performed during the previous month. deferred income taxes for differences based on depreciation methods. accounts payable for inventory items to be shipped on consignment.



All of the following are limitations to the information provided on the statement of financial position except the a. b.

quality of the earnings reported for the enterprise. judgments and estimates used regarding the collectibility, salability, and longevity of assets. omission of items that are of financial value to the business such as the worth of the employees. lack of current valuation for most assets and liabilities.

c. d. 324.

All of the following specifically require accounting policy disclosure in the annual independent auditors report except a. b.

a general description of methods of depreciation used for major asset classes. the specific method and computational technique used for last-in, first-out inventory. the method and period of amortization for intangible assets. the pension plan description, funding policy, and type of benefit formula.

c. d. 325.

Dixon Company has the following items recorded on its financial records. Available-for-sale securities Prepaid expenses Treasury stock

$200,000 400,000 100,000

The total amount of the above items to be shown as Assets on Dixon’s Statement of Financial Position is a. b. c. d. 326.

$400,000. $500,000. $600,000. $700,000.

Larry Mitchell, Bailey Company’s controller, is gathering data for the Statement of Cash Flows for the most recent year end. Mitchell is planning to use the direct method to prepare this statement, and has made the following list of cash inflows for the period. • • •

Collections of $100,000 for goods sold to customers. Securities purchased for investment purposes with an original cost of $100,000 sold for $125,000. Proceeds from the issuance of additional company stock totaling $10,000.

The correct amount to be shown as cash inflows from operating activities is Page 110 © 2008 Institute of Certified Management Accountants


a. b. c. d. 327.

$100,000. $135,000. $225,000. $235,000.

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 a.

Outflows for Investing Activities, $5,000; Inflows from Financial Activities, $10,000. Inflows from Investing Activities, $10,000; Outflows for Financing Activities, $5,000. Outflows for Operating Activities, $5,000; Inflows from Financing Activities, $10,000. Outflows for Financing Activities, $5,000; Inflows from Investing Activities, $10,000.

b. c. d.

328.

Atwater Company has recorded the following payments for the current period. Purchase Trillium stock Dividends paid to Atwater shareholders Repurchase of Atwater Company stock

$300,000 200,000 400,000

The amount to be shown in the Investing Activities Section of Atwater’s Cash Flow Statement should be a. b. c. d. 329.

$300,000. $500,000. $700,000. $900,000.

The following information has been compiled by Able Manufacturing Company to calculate its open trade receivables for inclusion in its Statement of Financial Position. • • • •

Sale of company products for the period to customers with net 30 day terms amounting to $150,000. Sale of company products for the period to a customer, supported by a note for $25,000, with special terms of net 180 days. Balance of trade receivables at the end of the last period was $300,000. Collections of open trade receivables during the period was $200,000. Page 111 © 2008 Institute of Certified Management Accountants

CMA Exam Retired Questions •

Rental income for the period, both earned and accrued but not yet collected, from the Able Employees’ Credit Union for use of company facilities was $2,000.

The open trade receivables balance to be shown on the Statement of Financial Position for the period is a. b. c. d. 330.

Which one of the following should be classified as an operating activity on the statement of cash flows? a. b. c. d.

331.

$250,000. $252,000. $275,000. $277,000.

A decrease in accounts payable during the year. An increase in cash resulting from the issuance of previously authorized common stock. The purchase of additional equipment needed for current production. The payment of a cash dividend from money arising from current operations.

Carlson Company has the following payments recorded for the current period. Dividends paid to Carlson shareholders Interest paid on bank loan Purchase of equipment

$150,000 250,000 350,000

The total amount of the above items to be shown in the Operating Activities Section of Carlson’s Cash Flow Statement should be a. b. c. d.

$150,000. $250,000. $350,000. $750,000.



Barber Company has recorded the following payments for the current period. Interest paid on bank loan Dividends paid to Barber shareholders Repurchase of Barber Company stock

$300,000 200,000 400,000

The amount to be shown in the Financing Activities Section of Barber’s Cash Flow Statement should be a. b. c. d. 333.

$300,000. $500,000. $600,000. $900,000.

Madden Corporation’s controller has gathered the following information as a basis for preparing the Statement of Cash Flows. Net income for the current year was $82,000. During the year, old equipment with a cost of $60,000 and a net carrying value of $53,000 was sold for cash at a gain of $10,000. New equipment was purchased for $100,000. Shown below are selected closing balances for last year and the current year. Cash Accounts receivable net Inventories Equipment Accumulated depreciation - equipment Accounts payable Notes payable Common stock Retained earnings

Last Year $ 39,000 43,000 93,000 360,000 70,000 22,000 100,000 250,000 93,000

Current Year $ 85,000 37,000 105,000 400,000 83,000 19,000 100,000 250,000 175,000

Madden’s cash inflow from operating activities for the current year is a. b. c. d. 334.

$63,000. $73,000. $83,000. $93,000.

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

Amortization expense. Decrease in income taxes payable. Proceeds from the issuance of common stock. Decrease in inventories. Page 113 © 2008 Institute of Certified Management Accountants


The computations required to prepare the statement of cash flow include all of the following except a. b. c. d.

336.

borrowing via notes payable or bonds. the sale of goods or services. equipment purchased with a note payable. the sale of investments in debt or equity securities.

Selected financial information for Kristina Company for the year just ended is shown below. Net income Increase in accounts receivable Decrease in inventory Increase in accounts payable Depreciation expense Gain on the sale of available-for-sale securities Cash receivable from the issue of common stock Cash paid for dividends Cash paid for the acquisition of land Cash received from the sale of available-for-sale securities

$2,000,000 300,000 100,000 200,000 400,000 700,000 800,000 80,000 1,500,000 2,800,000

Kristina’s cash flow from financing activities for the year is a. b. c. d. 337.

$(80,000). $720,000. $800,000. $3,520,000.

Selected financial information for Kristina Company for the year just ended is shown below. Net income Increase in accounts receivable Decrease in inventory Increase in accounts payable Depreciation expense Gain on the sale of available-for-sale securities Cash receivable from the issue of common stock Cash paid for dividends Cash paid for the acquisition of land Cash received from the sale of available-for-sale securities Page 114 © 2008 Institute of Certified Management Accountants

$2,000,000 300,000 100,000 200,000 400,000 700,000 800,000 80,000 1,500,000 2,800,000


Kristina’s cash flow from investing activities for the year is a. b. c. d. 338.

$(1,500,000). $1,220,000. $1,300,000. $2,800,000.

King Company has the following investment portfolio. Trading securities Quill Company common stock Barton Inc. common stock Delta Inc. 8% bonds Securities to be held to maturity Armand Inc. 9% bonds Port City municipal bonds Available-for-sale securities Knox Co. common stock Vernon Inc. preferred stock

Cost

Market Value

$140,000 125,000 225,000

$150,000 110,000 240,000

80,000 180,000

84,000 210,000

45,000 97,000

51,000 109,000

The total value of these investments to be reported on King’s Statement of Financial Position is . a. $892,000. b. $902,000. c. $920,000. d. $954,000. 339.

The following information applies to the Income Statement of Addison Company. Gross sales $1,000,000 Net sales 900,000 Freight-in 10,000 Ending inventory 200,000 Gross profit margin 40% Addison’s cost of goods available for sale is a. b. c. d.



For the fiscal year just ended, Doran Electronics had the following results. Net income Depreciation expense Increase in accounts payable Increase in accounts receivable Increase in deferred income tax liability

$920,000 110,000 45,000 73,000 16,000

Doran’s net cash flow from operating activities is a. b. c. d. 341.

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 Flows as a. b. c. d.

342.

$928,000. $986,000. $1,018,000. $1,074,000.

Zero. $50,000. $100,000. $150,000.

Selected financial information for Kristina Company for the year just ended is shown below. Net income $2,000,000 Increase in accounts receivable Decrease in inventory Increase in accounts payable Depreciation expense Gain on the sale of available-for-sale securities Cash receivable from the issue of common stock Cash paid for dividends Cash paid for the acquisition of land Cash received from the sale of available-for-sale securities

300,000 100,000 200,000 400,000 700,000 800,000 80,000 1,500,000 2,800,000

Assuming the indirect method is used, Kristina’s cash flow from operating activities for the year is a. b. c. d.



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. b. c. d.

344.

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. b. c. d.

345.

d.

must be presented using the direct method of disclosure. must be presented using the indirect method of disclosure. should be presented using the direct method but use of the indirect method of disclosure is allowed. can be presented in any logical format if cash flow per share of common stock is clearly disclosed.

In the determination of net income, disclosure is required in the income statement for all of the following items except a. b. c. d.

347.

direct method of calculating net cash provided or used by operating activities. cash method of determining income in conformity with generally accepted accounting principles. format of the statement of cash flows. indirect method of calculating net cash provided or used by operating activities.

Statements on Financial Accounting Standards No. 95, “Statement of Cash Flows,” states that cash flows from operating activities a. b. c.

346.

direct method. indirect method. single-step method. multiple-step method.

an item of income related to the correction of an error in the financial statements of a prior period. an extraordinary gain. the effect of a change in an accounting principle. a loss on the disposal of a segment of business.

All of the following are examples of cash equivalents for presentation on the statement of financial position except a. b. c. d.

commercial paper. money market funds. treasury bills. treasury bonds. Page 117 © 2008 Institute of Certified Management Accountants


Dawson Corporation just received its bank statement for the month of May. This statement revealed that $2,500 of Dawson’s deposits had not yet been recorded by the bank, outstanding checks totaled $1,500, a bank service charge of $100 had been assessed, and Dawson had erroneously recorded a check written for $1,000 as $100. As of May 31, Dawson’s records indicated a cash balance of $40,500. The ending cash balance as of May 31 reported on the bank statement would have been a. b. c. d.

349.

A change in the estimate for bad debts should be a. b. c. d.

350.

treated as an error. handled retroactively. considered as an extraordinary item. treated as affecting only the period of the change.

A receivable classified as current on the statement of financial position is expected to be collected within a. b. c. d.

351.

$42,500. $41,100. $39,900. $38,500.

the current operating cycle. one year. the current operating cycle or one year, whichever is longer. the current operating cycle or one year, whichever is shorter.

The following information applies to Nicholas Manufacturing Company which has a sixmonth operating cycle. Cash sales Credit sales during the sixth month with net 30 days terms Credit sale during the fifth month with special terms of net 9 months Interest earned and accrued on an investment that matures during month three of the next cycle

$100,000 150,000 10,000 2,000

The total of Nicholas’ trade accounts receivable at the end of the current cycle is a. b. c. d.



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 current net income and total current assets, respectively? a. b. c. d.

353.

$300,000. $260,000. $240,000. $160,000.

The advantage of the last-in, first-out inventory method is based on the assumption that a. b. c. d.

355.

Total Current Assets Decrease. Decrease. No effect. No effect.

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. b. c. d.

354.

Net Income Decrease No effect Decrease No effect

the most recently incurred costs should be allocated to the cost of goods sold. costs should be charged to revenue in the order in which they are incurred. costs should be charged to cost of goods sold at average cost. current costs should be based on representative or normal conditions of efficiency and volume of operations.

In a period of rising prices, which one of the following inventory methods usually provides the best matching of expenses against revenues? a. b. c. d.

Weighted average. First-in, first-out. Last-in, first out. Specific identification.



A major advantage of the first-in, first-out (FIFO) process-costing method over the weighted-average process-costing method is a. b. c. d.

357.

Which one of the following actions would result in a decrease in income? a. b. c. d.

358.

Liquidating last-in, first-out layers of inventory when prices have been increasing. Changing from first-in, first-out to last-in, first-out inventory method when prices are decreasing. Accelerating purchases at the end of the year when using the last-in, first-out inventory method in times of rising prices. Changing the number of last-in, first-out pools.

In periods of rising costs, which one of the following inventory cash flow assumptions will result in higher cost of sales? a. b. c. d.

359.

the simplicity of the FIFO method. that inventories are eliminated from consideration in the FIFO method. that current period cost per unit is highlighted under the FIFO method. that only ending inventory costs need to be separately computed when using the FIFO method.

First-in, first-out. Last-in, first-out. Weighted average. Moving average.

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 a. b. c. d.

cumulative-effect type accounting change. retroactive-effect type accounting change change in an accounting estimate. correction of an error.



Holly Company’s inventory is overstated at December 31 of this year. The result will be a. b. c. d.

361.

Which one of the following errors will result in the overstatement of net income? a. b. c. d.

362.

understated income this year. understated retained earnings this year. understated retained earnings next year. understated income next year.

Overstatement of beginning inventory. Overstatement of ending inventory. Overstatement of goodwill amortization. Overstatement of bad debt expense.

Arthur Corporation uses the dollar-value last-in, first-out (LIFO) method to value its inventories. Historical information indicates the following. Year 1 2 3

Inventory at End-of-Year Prices $100,000 102,440 121,000

Price Index 100 104 110

Inventory at Base-Year Prices $100,000 98,500 $110,000

During Year 4, inventory at end-of-year and base-year prices totaled $125,440 and $112,000, respectively. The ending inventory at LIFO cost for Year 4 is a. b. c. d. 363.

$113,390. $113,330. $113,240. $112,000.

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. b. c. d.

average cost. first-in, first-out. last-in, first-out. either first-in, first-out or last-in, first-out.



The following data apply to a unit of inventory. Selling price Selling cost Normal profit margin Replacement cost

$22 2 5 10

Using the lower of cost or market method of valuing inventory, what is the market amount for this unit of inventory? a. b. c. d. 365.

Investments classified as held-to-maturity under the provisions of Statements of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” would be valued at a. b. c. d.

366.

fair value, with unrealized gains and losses reported in net income. fair value, with unrealized gains and losses reported in a separate component of shareholders’ equity. replacement cost, with no unrealized gains or losses reported. amortized cost, with no unrealized gains or losses reported.

Which one of the following statements with regard to marketable securities is incorrect? a. b. c. d.

367.

$10.00. $15.00. $17.50. $20.00.

In the trading portfolio of marketable equity securities, unrealized gains and losses are recorded on the income statement. In the available-for-sale portfolio of marketable equity securities, unrealized gains and losses are recorded on the income statement. The held-to-maturity portfolio consists only of debt securities. Securities may be transferred from the held-to-maturity to the available-for-sale portfolio.

On January 1, Jennie Corporation purchased 30% of the common stock of Katlee Company for $500,000. The following information relates to Katlee at the date of acquisition. Cash Accounts receivable (net) Building (net) Land Liabilities

$ 50,000 250,000 700,000 100,000 100,000



Additional information relating to the purchase is shown below. 1. 2. 3. 4. 5.

Jennie has the ability to exercise significant influence over Katlee. Both the book value and the fair value are the same for the receivables, land, and liabilities. The fair market value of the building is $900,000. Jennie depreciates its assets on a straight-line basis. Both tangible and intangible assets are amortized over 10 years. For the current year, Katlee had net income of $400,000 and declared and paid dividends of $100,000.

What amount should Jennie report for its investment in Katlee at the end of the current year? a. b. c. d. 368.

Securities held primarily for sale in the near term to generate income on short-term price differences are known as a. b. c. d.

369.

available-for-sale securities. equity securities. held-to-maturity securities. trading securities.

Unrealized gains and losses on trading securities should be presented in the a. b. c. d.

370.

$500,000. $570,000. $600,000. $620,000.

statement of financial position. income statement. footnotes to the financial statements. statement of retained earnings.

Vanity Corporation holds investments in equity securities. These investments were acquired last year and have been properly classified as available-for-sale (AFS) securities in accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” During the current year, the company sold some of the AFS securities at a loss. At year end, the remaining portfolio of AFS securities had appreciated in total value compared to the value at the end of last year. Based on these facts, which one of the following should Vanity report in its financial statements at the end of the current year? Page 123 © 2008 Institute of Certified Management Accountants


a. b. c. d.

371.

Balance Sheet Unrealized holding gain on appreciation of AFS securities. Unrealized holding gain on appreciation of AFS securities. Unrealized loss on sale of AFS securities. Unrealized holding gains/ losses not reported here on AFS securities

Orchard Corporation issued 100,000 shares of its $10 par value common stock (current fair value $50 per share) on December 31 to the holders of all 10,000 common shares ($1 par value) of Morgan Company’s common stock in exchange for Morgan’s common stock. Morgan will continue as a wholly-owned subsidiary of Orchard. Orchard’s outof-pocket costs related to the combination are $150,000, comprised of $100,000 of legal fees directly related to the combination and $50,000 in costs related to the registration statement filed with the Securities and Exchange Commission to issue the 100,000 shares. At December 31, the fair value of Morgan’s identified net assets exceeded the carrying amount by $250,000. The balance in the Investment in Morgan Company Common Stock account on Orchard’s Statement of Financial Position as of December 31 should be a. b. c. d.

372.

Income Statement Unrealized loss on sale of AFS securities Realized loss on sale of AFS securities Unrealized holding gain on appreciation of AFS securities Realized loss on sale of AFS securities and unrealized holding gain on appreciation of AFS securities.

$1,100,000. $1,150,000. $5,000,000. $5,100,000.

Johnstone Company owns 10,000 shares of Breva Corporation’s stock; Breva currently has 40,000 shares outstanding. During the year, Breva had net income of $200,000 and paid $160,000 in dividends. At the beginning of the year, there was a balance of $150,000 in Johnstone’s Investment in Breva Corporation account. At the end of the year, the balance in this account should be a. b. c. d.

$110,000. $150,000. $160,000. $240,000.



DiAngelo Company entered into a transaction involving the exchange of nonmonetary assets with Louden Company. The assets being exchanged were considered to be dissimilar in nature. As part of the exchange transaction, DiAngelo also received cash from Louden. However, the exchange transaction resulted in a loss to DiAngelo. With regard to DiAngelo’s loss, which one of the following best characterizes the proper accounting treatment? a. b. c. d.

374.

To determine if the impairment of a depreciable fixed asset has occurred, a company must compare the a. b. c. d.

375.

It is not recognized since the assets are dissimilar in nature. It is not recognized since DiAngelo also received boot. It is fully recognized in the year of the exchange. It is partially recognized in the year of the exchange based on the ratio of boot received to the total value of all consideration received.

book value of the asset and the present value of the future cash flows expected to be generated by the asset. original cost of the asset and the fair market value of the asset. book value of the asset and the undiscounted future cash flows expected to be generated by the asset. original cost of the asset and the book value of the asset.

In accordance with Statements of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets,” Blake Corporation has determined that an impairment exists on one of its machines. However, the company expects to continue to use the asset for another three full years as no active market exists for this machine. Selected information on the impaired asset (on the date that impairment was determined to exist) is provided below. • • • •

Original cost of the machine Book (carrying) value of the machine Undiscounted future cash flows expected to be generated by the machine Fair value of the machine (determined by computing the present value of the future cash flows expected to be generated by the machine)

$22,000 20,000 15,000 12,000

After recognition of the impairment loss, the carrying amount (book value) of the impaired asset will be a. b. c. d.

Zero. $12,000. $14,000. $15,000. Page 125 © 2008 Institute of Certified Management Accountants


All of the following would be included as part of the cost of a depreciable asset except the a. b. c. d.

377.

costs to level land to make it usable for the company’s purposes. freight costs to ship new equipment to the company’s facility. actual interest costs incurred during the construction of a new building. costs to construct a driveway on the company’s property.

A change in the estimated useful life of a depreciable asset should be reported a. b. c. d.

378.

prospectively. retroactively. either prospectively or retroactively. both prospectively and retroactively.

In accordance with Statements of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets,” Blake Corporation has determined that an impairment exists on one of its machines. However, the company expects to continue to use the asset for another three full years as no active market exists for this machine. Selected information on the impaired asset (on the date that impairment was determined to exist) is provided below. • • • •

Original cost of the machine Book (carrying) value of the machine Undiscounted future cash flows expected to be generated by the machine Fair value of the machine (determined by computing the present value of the future cash flows expected to be generated by the machine)

$22,000 20,000 15,000 12,000

What is the amount of the impairment loss to be recorded by Blake? a. b. c. d. 379.

$3,000. $5,000. $7,000. $8,000.

Handyman Tools Inc. is negotiating to purchase Hal’s Hardware Stores. Hal’s net income has averaged $90,000 over the past three years, including an extraordinary loss of $24,000 last year. All of Hal’s assets are stated at fair market value, except for a building that cost $100,000 when purchased five years ago. Hal has been depreciating the building using the straight-line method over a 20-year life. Handyman, which also uses straight-line depreciation, believes the fair market value of the building is $120,000, with Page 126 © 2008 Institute of Certified Management Accountants

CMA Exam Retired Questions a remaining life of 25 years. If Handyman purchases Hal’s Hardware, the expected increase in Handyman’s income would be a. b. c. d. 380.

The Board of Directors of Ingold Industries Inc. authorized Don Burger, president of Ingold, to pay as much as $90,000 to purchase a tract of land adjacent to the main factory. Burger negotiated a price of $75,800 for the land, and legal fees for closing costs amounted to $820. A contractor cleared, filled, and graded the land for $6,800, and dug the foundation for a new building for $4,300. A prefabricated building was erected at a cost of $181,000. The building has an estimated useful life of 20 years with no residual value. The contractor’s bill indicated that the cost of the parking lot and driveways was $7,060. The parking lot and the driveways will need to be replaced in 15 years. The proper amount to be recorded in Ingold’s land account is a. b. c. d.

381.

$114,200. $98,200. $97,800. $90,200.

$76,620. $83,420. $87,720. $90,480.

Widner Corporation acquired machinery on January 1 for $9,000 for use in its manufacturing plant. During the year, the machine was used to produce 1,000 units, of which 600 were sold. There was no work-in-process inventory at the beginning or at the end of the year. Installation charges of $300 and delivery charges of $200 were also incurred. During the installation process, one of the machine parts was damaged and had to be repaired at a cost of $100. The machine is expected to have a useful life of five years with an estimated salvage value of $1,500. Widner uses the straight-line depreciation method. How will the straight-line depreciation amount be reported in Widner’s financial statement? a. b. c. d.

The entire amount will be reported as a selling and administrative expense. Part of the amount will be in selling and administrative expense and part in cost of goods sold. The entire amount will be reported in cost of goods sold. Part of the amount will be reported in finished goods inventory and part in cost of goods sold.



Wellington Industries has owned its present facilities since 1981, and Mary Dunlap, CEO, has authorized various expenditures to repair and improve the building during the current year. The building was beginning to sag, and without repair the building would only last another 8 years. In order to correct the problem, the foundation was reinforced and several lolly columns were added in the basement area at a cost of $47,200. As a result, company engineers estimate that the building will have a remaining useful life of 20 years. In order to install a new computer local area network (LAN) and be ready for the next generation of computers, the phone lines and electrical systems were updated at a cost of $81,300. Wellington engineers estimate that these improvements should last 25 years. The offices and open work spaces were rearranged to reduce exposure to electronic emissions at a material cost of $31,000. The purchase and installation of the computers and software for the LAN cost $102,700. Wellington’s manager of information systems believes that the LAN hardware and software will have to be replaced in 6 years, but further rearrangement of the offices and open work spaces will not be necessary. After the above improvements were completed, the entire building was painted inside and outside at a cost of $9,450. As controller of Wellington Industries, which one of the following actions would you recommend to be in conformity with generally accepted accounting principles? a. b. c. d.

383.

Which one of the following characteristics is not required for an asset to be properly described as property, plant and equipment? a. b. c. d.

384.

Treat all expenditures as expenses in the current year except the cost of rearrangement ($31,000), which should be amortized over a period not to exceed 20 years. Capitalize all expenditures as they represent additions, improvements, and rearrangements. Capitalize all costs with the exception of the upgrade to the phone and electrical systems and the painting as they represent maintenance expenses. Capitalize all costs with the exception of the painting as it represents maintenance expense.

Held for use and not for investment. Newly purchased. Expected life of more than one year. Tangible.

Albright Company uses the sum-of-the-years’ digits method of depreciation. On January 1, the company purchased a machine for $50,000, with an estimated life of 5 years and no residual value. Depreciation for the first year would be a. b. c. d.



Equipment bought by James Steam Generating Company three years ago was charged to equipment expense in error. The cost of the equipment was $100,000, with no expected salvage value, and a 10-year estimated life. James uses the straight-line depreciation method on similar equipment. The error was discovered at the end of year 3 prior to the issuance of James’ financial statements. After correction of the error, the correct carrying value of the equipment will be a. b. c. d.

386.

Lakeside Electric purchased a truck for $38,600 to transport equipment to various job sites. For this purpose, storage bins were welded to the truck bed at a cost of $1,700. Doug Lombardi, controller of Lakeside, estimates the useful life of the truck to be 5 years and the residual value to be $1,000. Using the double-declining-balance method, the depreciation expense on the truck for its second year of use is a. b. c. d.

387.

$30,000. $70,000. $80,000. $100,000.

$9,024. $9,264. $9,432. $9,672.

Neary Company has entered into a contract to lease computers from Baldwin Company starting on January 1. Relevant information pertaining to the lease is provided below. • • • • •

Lease term Useful life of computers Present value of future lease payments Fair value of leased asset on date of lease Baldwin’s implicit rate

4 Years 5 Years $100,000 105,000 10%

At the end of the lease term, ownership of the asset transfers from Baldwin to Neary. Neary has properly classified this lease as a capital lease on its financial statements, and uses straight-line depreciation on comparable assets. What is the annual depreciation expense that Neary will record on the leased computers? a. b. c. d.



Basic Brick Inc. purchased manufacturing equipment for $100,000, with an estimated useful life of 10 years and a salvage value of $15,000. The second year’s depreciation for this equipment using the double-declining-balance method is a. b. c. d.

389.

Which one of the following methods of depreciation will result in the lowest reported net income in the early life of a depreciable asset? a. b. c. d.

390.

Composite depreciation method. Group depreciation method. Straight-line depreciation method. Sum-of-the-years’ digits depreciation method.

Silken Inc., a distributor of silk goods, is in its first year of operation. The company has purchased ten computers at $3,500 each with an estimated life of 6 years, five desks at $500 each with an estimated life of 10 years, and two word processors at $300 each with an estimated life of 4 years. No residual value is anticipated for any of these assets. Silken wants to adopt a depreciation method that will be easy to use and reflect an appropriate depreciation expense for the business each accounting period. The most appropriate method would be a. b. c. d.

391.

$8,500. $13,600. $16,000. $20,000.

composite depreciation. group depreciation. inventory method. replacement method.

Patricia Company purchased all of the outstanding common stock of Echo Company three years ago by issuing 200,000 shares of $1.00 par value stock which at the time had a market value of $9.00. Because of uncertainties as to the value of Echo, it was agreed that 10,000 additional shares would be issued if Echo’s earnings averaged more than $180,000 during the next three years. Echo has met the $180,000 earnings contingency at the end of three years, and the 10,000 additional shares were issued when the market value was $10.00 per share. As a result of this transaction, Patricia’s consolidated Statement of Financial Position should include a. b. c. d.

a $100,000 increase in goodwill. a $100,000 decrease in retained earnings. $100,000 additional paid-in-capital in excess of par. the same total assets, total liabilities, and total shareholders’ equity as before the transaction. Page 130 © 2008 Institute of Certified Management Accountants


Alton Corporation purchased 100% of the shares of Jones Corporation for $600,000. Financial information for Jones Corporation is provided below.

Cash Accounts receivable Inventory Total current assets Property, plant & equipment (net) Total assets

Jones Corporation ($000) Book Value Fair Market Value $ 50 $ 50 100 100 150 100 300 250 500 600 $800 $850

Current liabilities Long-term debt Total liabilities Common stock Paid-in-capital Retained earnings Total shareholders’ equity Total liabilities & shareholders’ equity

$150 200 350 150 80 220 450 $800

$150 200 350 150 80

The amount of goodwill resulting from this purchase, if any, would be a. b. c. d. 393.

$200,000. $150,000. $100,000. Zero.

In a business combination to be accounted for as a purchase, Warner Company paid $1,300,000 for an 80% interest in Sun Company on January 2. At the time, Sun’s net assets had a book value of $1,000,000, while the market value of Sun’s land was $300,000 more than book value and the market value of Sun’s patents was $200,000 more than book value. All other assets and liabilities had book values equal to market value. In this situation, Warner should allocate the excess of cost over book value as a. b. c. d.

$300,000 to land and $200,000 to patents. $240,000 to land, $160,000 to patents, and $100,000 to goodwill. $500,000 to goodwill. $300,000 to land and $200,000 to goodwill.



All of the following could be properly classified as intangible assets on the statement of financial position except a. b. c. d.

395.

Hansen Inc. purchased a patent at the beginning of Year 1 for $22,100 that was to be amortized over 17 years. On July 1 of Year 8, Hansen incurred legal costs of $11,400 to successfully defend the patent. The amount of amortization expense that Hansen should record for Year 8 is a. b. c. d.

396.

$2,500. $1,971. $1,900. $1,300.

On July 1, Broadstreet Corporation acquired a patent on its new manufacturing process which streamlines its production operation. The cost of the patent was $17,000, and Broadstreet expects that the useful life of the new process will be 10 years, although the legal life of the patent is 17 years. Broadstreet is a calendar year corporation and is preparing its December 31 Statement of Financial Position. At which amount should the patent be reported at December 31 of the year of acquisition? a. b. c. d.

397.

goodwill. organization costs. prepaid insurance. trademarks.

$15,300. $16,000. $16,150. $16,500.

A liability arising from a loss contingency should be recorded if the a. b. c. d.

amount of the loss can be reasonably estimated. contingent future events have a reasonably possible chance of occurring. contingent future events have a reasonably possible chance of occurring and the amount of the loss can be reasonably estimated. contingent future events will probably occur and the amount of the loss can be reasonably estimated.



Linden Corporation is a defendant in a lawsuit where the plaintiff is seeking $1,000,000 in damages. The company had terminated the plaintiff, George Russell, from his position with Linden after Russell allegedly sold specifications for one of Linden’s new products to a competitor. Russell, who helped to develop the new product specifications, admitted he received cash for these plans but claimed he was wrongfully terminated from his position because Linden had no stated policy regarding this issue. Linden’s attorney believes that it is quite possible Linden will lose the case and, if so, damages could range from $100,000 to $200,000. Regardless of the outcome of the case, Linden’s accountants estimate the company will incur an additional $5,000 in unemployment costs because of Russell’s termination. The amount that Linden should accrue because of the contingency in this situation is a. b. c. d.

399.

$200,000. $100,000. $5,000. Zero.

Ichabod Company is the plaintiff in two lawsuits. The first suit involves a competitor who has made an exact copy of one of Ichabod’s products, and Ichabod is suing for patent infringement. The attorneys estimate a $5,000,000 award for Ichabod; however, it is anticipated that the case will be in litigation for 2 to 3 years before final resolution. The second case also involves patent infringement; however, in this instance, the attorneys do not believe Ichabod has a strong case. It is estimated the company has a 50% chance of winning, and the award, if any, would be in the $250,000 to $1,000,000 range. The most appropriate amount to be recorded as a gain contingency would be a. b. c. d.

400.

Zero. $5,000,000. $5,125,000. $5,250,000.

Warren Company is being sued in a wrongful discharge suit for $500,000. The company attorney has advised Warren that the probability of the plaintiff prevailing and receiving the full amount is about 80%. The attorney also indicated that the case would likely be tied up in the courts for 2 to 3 years. The most appropriate financial statement presentation for this loss contingency would be to a. b. c. d.

record $500,000 as a loss contingency. record $400,000 as a loss contingency. disclose the loss contingency in the footnotes. not record or footnote the loss contingency.



Which one of the following loss contingencies would be accrued as a liability rather than disclosed in the notes to the financial statement? a. b. c. d.

402.

A guarantee of the indebtedness of another. A dispute over additional income taxes assessed for prior years (now in litigation). A pending lawsuit with an uncertain outcome. Liabilities for service or product warranties made as a regular part of business.

Florida Corporation has the following items on its Statement of Financial Position. Treasury stock 5-year note payable Capital lease obligations Deferred income taxes 20-year bond Dividends payable Retained earnings

$ 8,000 12,000 15,000 7,000 20,000 3,000 14,000

What is the amount that should be classified as long-term debt? a. b. c. d. 403.

On January 1, Evangel Company issued 9% bonds in the face amount of $100,000, that mature in five years. The bonds were issued for $96,207 to yield 10%, resulting in a bond discount of $3,793. Evangel uses the effective interest method of amortizing bond discount. Interest on the bonds is payable annually on December 31. What is the amount of interest to be paid at the end of the first year? a. b. c. d.

404.

$54,000. $62,000. $68,000. $79,000.

$8,659. $9,000. $9,621. $10,000.

On January 1, Evangel Company issued 9% bonds in the face amount of $100,000, that mature in five years. The bonds were issued for $96,207 to yield 10%, resulting in a bond discount of $3,793. Evangel uses the effective interest method of amortizing bond discount. Interest is payable annually on December 31. What is the amount of interest expense that should be reported on Evangel’s Income Statement for the second year? Page 134 © 2008 Institute of Certified Management Accountants


On January 1, bonds with a face value of $200,000, an 8% annual effective yield, and a 7% annual coupon rate were sold by Thomas Dynamics Inc. for $180,000, The bonds pay interest January 1 and July 1. Using the effective interest method, the company’s interest expense for the first six months ended July 1 will be a. b. c. d.

406.

$621. $2,452. $3,172. $3,793.

On January 1, Evangel Company issued 9% bonds in the face amount of $100,000, that mature in five years. The bonds were issued for $96,207 to yield 10%, resulting in a bond discount of $3,793. Evangel uses the effective interest method of amortizing bond discount. Interest is payable annually on December 31. The carrying amount of the bonds payable, net of discount at the end of the first year, is a. b. c. d.

408.

$7,000. $7,200. $14,000. $14,400.

On January 1, Evangel Company issued 9% bonds in the face amount of $100,000, that mature in five years. The bonds were issued for $96,207 to yield 10%, resulting in a bond discount of $3,793. Evangel uses the effective interest method of amortizing bond discount. Interest is payable annually on December 31. What is the amount of Evangel’s unamortized bond discount at the end of the first year? a. b. c. d.

407.

$8,779. $9,000. $9,559. $9,683.

$94,866. $95,586. $96,828. $97,548.

On January 1, Evangel Company issued 9% bonds in the face amount of $100,000, that mature in five years. The bonds were issued for $96,207 to yield 10%, resulting in a bond discount of $3,793. Evangel uses the effective interest method of amortizing bond discount. Interest is payable annually on December 31. What is the amount of interest Page 135 © 2008 Institute of Certified Management Accountants

CMA Exam Retired Questions expense that should be reported on Evangel’s Income Statement at the end of the first year? a. b. c. d. 409.

A premium on bonds payable arises when a. b. c. d.

410.

reduction to the long-term liability account Bonds Payable. increase to the long-term asset account Premium on Bonds Payable. increase to the valuation liability account Premium on Bonds Payable. increase to the long-term liability account Bonds Payable.

The purchase of treasury stock is recorded on the statement of financial position as a(n) a. b. c. d.

412.

the semi-annual bond interest becomes due. the prevailing interest rate after the bond issuance falls below the nominal rate of the bonds. the amount received from sale of the bonds at issuance exceeds the face value of the bonds. the cost of issuing the bonds is capitalized.

Alabaster Company issued $1,000,000 in bonds that sold for a $50,000 premium. The bond premium should be recorded as a(n) a. b. c. d.

411.

$8,659. $9,000. $9,621. $10,000.

increase in assets. decrease in assets. increase in shareholders’ equity. decrease in shareholders’ equity.

A company pays more than the fair market value to acquire treasury stock in order to avoid a takeover attempt. The difference between the price paid to acquire the treasury stock and the fair market value should be recorded as a. b. c. d.

an asset. a liability. shareholders’ equity. an expense.



Tyler Corporation purchased 10,000 shares of its own $5 par value common stock for $25 per share. This stock originally sold for $28 per share. Tyler used the cost method to record this transaction. If the par value method had been used rather than the cost method, which of the following accounts would show a different dollar amount? a. b. c. d.

414.

Treasury Stock and Total Shareholders’ Equity. Paid-in Capital in Excess of Par and Retained Earnings. Paid-in Capital from Treasury Stock and Retained Earnings. Paid-in Capital in Excess of Par and Treasury Stock.

Morris Corporation uses the cost method to account for treasury stock transactions. As of June 30, the corporation had the following account balances. Treasury stock (100 shares at a cost of $20 per share) $2,000 Paid-in-capital from previous treasury stock transactions 400 On July 15, Morris sold the 100 shares of treasury stock for $18 per share. As a result of this transaction, what amount would Morris charge to retained earnings, if any, under the cost method of accounting for treasury stock transactions? a. b. c. d.

415.

Which one of the following statements regarding treasury stock is correct? a. b. c. d.

416.

Zero $200. $300. $400.

It is unretired but no longer outstanding, yet has all the rights of outstanding shares. It is an asset, representing shares that can be sold in the future or otherwise issued in stock option plans or in effectuating business combinations. It is unable to participate in the liquidation proceeds of the firm, but able to participate in regular cash dividend distributions as well as stock dividends and stock splits. It is reflected in shareholders’ equity as a contra account and, in some states, as a restriction on retained earnings.

A significant noncash transaction that need not be reported on the statement of cash flows is a. b. c. d.

the acquisition of assets by assuming liabilities. the conversion of common stock to preferred stock. a stock dividend declared during the year. an issuance of equity securities to retire debt. Page 137 © 2008 Institute of Certified Management Accountants


On December 1, Noble Inc.’s Board of Directors declared a property dividend, payable in stock held in the Multon Company. The dividend was payable on January 5. The investment in Multon stock had an original cost of $100,000 when acquired two years ago. The market value of this investment on December 1 was $150,000, on December 31 was $175,000, and on January 5 was $160,000. The amount to be shown on Noble’s Statement of Financial Position at December 31 as Property Dividends Payable would be a. b. c. d.

418.

Reese Corporation declared a property dividend on January 31 of 1,000 shares of its investment in Alpha Corporation stock, payable February 15. The stock had a carrying value (cost) of $75 per share and a market value of $100 per share on the date of declaration. The amount charged to retained earnings as a result of this dividend declaration would be a. b. c. d.

419.

$25,000. $75,000. $100,000. $175,000.

Which one of the following would most likely cause earnings per share to increase? a. b. c. d.

420.

$100,000. $150,000. $160,000. $175,000.

Issuing stock options when the option price is greater than the market price. Postponing the declaration of dividends. Selling shares of stock at a price greater than the par value. Purchasing treasury stock.

Garland Corporation, a public company, has declared a property dividend of one share of its investment in Marlowe Inc. for every ten shares of its common stock outstanding. The Marlowe shares were originally purchased by Garland for $50 per share; on the date the dividend was declared, the market value was $75 per share. As a result of this declaration, Garland should recognize a. b. c. d.

a loss of $25 per share to be distributed. a gain of $25 per share to be distributed. no gain or loss. an appropriate gain or loss based on the market value on the date of distribution.



Treasury stock is a. b. c. d.

422.

A company has beginning net assets of $100,000 and ending net assets of $95,000. During the year, additional capital stock was sold for $8,000 and dividends of $3,000 were declared. Using the capital maintenance approach, the net income (loss) for the year is calculated as a. b. c. d.

423.

Zero. $5,000. $(5,000). $(10,000).

Grand Corporation has 10,000,000 shares of $10 par value stock authorized, of which 2,000,000 shares are issued and outstanding. The Board of Directors of Grand declared a 2-for-1 stock split on November 30 to be issued on December 30. The stock was selling for $30 per share on the date of declaration. In addition, the Board has amended the Articles of Incorporation to allow for a proportional increase in the number of authorized shares. The par value information appearing in the Shareholder’s Equity Section of Grand’s Statement of Financial Position at December 31 will be a. b. c. d.

424.

an asset of the company. retired stock. reacquired stock that is being held for reissue. shareholder stock certificates held in the Treasury Department.

$5. $10. $15. $30.

Fox Company has 1,000,000 shares of common stock authorized, of which 100,000 shares are held as treasury shares; the remainder are held by the company shareholders. On November 1, the Board of Directors declared a cash dividend of $.10 per share to be paid on January 2. At the same time, the Board declared a 5% stock dividend to be issued on December 31. On the date of the declaration, the stock was selling for $10 a share, and no fractional shares were to be issued. The total amount of these declarations to be shown as current liabilities on Fox’s Statement of Financial Position as of December 31 is a. b. c. d.



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 Payable had decreased by $5,000 throughout the year, despite the fact that both cash 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 Dividends as a. b. c. d.

426.

How would a stock split affect the par value of the stock and the company’s shareholders’ equity? a. b. c. d.

427.

Par Value Decrease Decrease Increase Increase

Shareholders’ Equity Increase. No Change. Decrease. No Change.

An undistributed stock dividend declared by the Board of Directors should be reported as a(n) a. b. c. d.

428.

$20,000. $15,000. $12,000. $5,000.

current liability. long-term liability. a footnote to the financial statements. an item in the shareholders’ equity section.

Which one of the following statements regarding dividends is correct? a. b. c. d.

A stock dividend of 15% of the outstanding common shares results in a debit to retained earnings at the par value of the stock distributed. At the declaration date of a 30% stock dividend, the carrying value of retained earnings will be reduced by the fair market value of the stock distributed. The declaration of a cash dividend will have no effect on book value per share. The declaration and payment of a 10% stock dividend will result in a reduction of retained earnings at the fair market value of the stock.



Which one of the following transactions does not affect the balance of retained earnings? a. b. c. d.

430.

Underhall Inc.’s common stock is currently selling for $108 per share. Underhall is planning a new stock issue in the near future and would like to stimulate interest in the company. The Board, however, does not want to distribute capital at this time. Therefore, Underhall is considering whether to offer a 2-for-1 common stock split or a 100% stock dividend on its common stock. The best reason for opting for the stock split is that a. b. c. d.

431.

Declaration of a stock dividend. A quasi-reorganization. Declaration of a stock split. Declaration of a property dividend.

it will not decrease shareholders’ equity. it will not impair the company’s ability to pay dividends in the future. the impact on earnings per share will not be as great. the par value per share will remain unchanged.

At the beginning of the year, Lewis Corporation had 100,000 shares of common stock outstanding. During the year, the following transactions occurred. Date April 1 July 1 October 1

Transaction Issued 10,000 shares in exchange for land Declared and distributed a 10% stock dividend Purchased 5,000 shares of treasury stock

The number of shares that Lewis should use when computing earnings per share at the end of the year is a. b. c. d. 432.

117,000. 116,000. 111,750. 106,250.

The Treasurer of Barker Corporation is considering the impact of the company's convertible debt on its earnings per share. The firm has $10,000,000 of convertible outstanding, with a 10 percent coupon, convertible into Barker's common stock at $200 per share. If this convertible debt remains outstanding, the income statement next year is forecasted to appear as follows:


CMA Exam Retired Questions Operating income Interest expense Pretax income Tax expense Net income

$11,000,000 1,000,000 10,000,000 4,000,000 $6,000,000

Shares outstanding

1,000,000

Basic earnings per share

$6

If the convertible debt is called by Barker, conversion will take place. Barker has a 40 percent tax rate. Assuming conversion of the debt occurs at the beginning of the year the forecasted impact on Barker's basic earnings per share for the next year will be a. b. c. d. 433.

dilutive. no impact. antidilutive. not determinable.

Selected financial data for ABC Company is presented below. • • • • • •

For the year just ended ABC has net income of $5,300,000. $5,500,000 of 7% convertible bonds were issued in the prior year at a face value of $1,000. Each bond is convertible into 50 shares of common stock. No bonds were converted during the current year. 50,000 shares of 10% cumulative preferred stock, par value $100, were issued in the prior year. Preferred dividends were not declared in the current year, but were current at the end of the prior year. At the beginning of the current year 1,060,000 shares of common stock were outstanding. On June 1 of the current year 60,000 shares of common stock were issued and sold. ABC's average income tax rate is 40%.

ABC Company's basic earnings per share for the current fiscal year is a. b. c. d.

$3.67. $4.29. $4.38. $4.73.



Collins Company reported net income of $350,000 for the year. The company had 10,000 shares of $100 par value, non-cumulative, 6% preferred stock and 100,000 shares of $10 par value common stock outstanding. There were also 5,000 shares of common stock in treasury during the year. Collins declared and paid all preferred dividends as well as a $1 per share dividend on common stock. Collins’ earnings per share of common stock for the year was a. b. c. d.

435.

Ray Company has 530,000 common shares outstanding at year-end. At December 31, for basic earnings per share purposes, Ray computed its weighted average number of shares as 500,000. Prior to issuing its annual financial statements, but after year-end, Ray split its stock 2 for 1. Ray's weighted average number of shares to be used for computing annual basic earnings per share is a. b. c. d.

436.

500,000. 530,000. 1,000,000. 1,060,000.

On January 1, Esther Pharmaceuticals had a balance of 10,000 shares of common stock outstanding. On June 1, the company issued an additional 2,000 shares of common stock for cash. A total of 5,000 shares of 6%, $100 par, nonconvertible preferred stock was outstanding all year. Esther’s net income was $120,000 for the year. The earnings per share for the year were a. b. c. d.

437.

$3.50. $3.33. $2.90. $2.76.

$7.50. $8.06. $10.00. $10.75.

Roy company had 120,000 common shares and 100,000 preferred shares outstanding at the close of the prior year. During the current year Roy repurchased 12,000 common shares on March 1, sold 30,000 common shares on June 1, and sold an additional 60,000 common shares on November 1. No change in preferred shares outstanding occurred during the year. The number of shares of stock outstanding to be used in the calculation of basic earnings per share at the end of the current year is a. b. c. d.

100,000. 137,500. 198,000. 298,000. Page 143 © 2008 Institute of Certified Management Accountants


Robin Gavaskar, who recently founded a company that produces baseball bats and balls, wants to determine her company's policy for revenue recognition. According to the revenue recognition principle, the most appropriate time to recognize revenue would be when a. b. c. d.

439.

A public company engaged in the mining of precious metals would most likely recognize revenue using the a. b. c. d.

440.

the sale occurs. cash is received. production is completed. quarterly financial statements are prepared.

percentage-of-completion method. completion-of-production method. accretion basis. discovery basis.

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. Cumulative cost to date Costs to complete at year end Progress billings Collections on account

Year 1 $300,000 250,000 325,000 300,000

Year 2 $390,000 130,000 220,000 200,000

Year 3 $530,000 -0155,000 200,000

Assuming that $65,000 was recognized as gross profit in Year 1, the amount of gross profit Paulson recognized in Year 2 was a. b. c. d. 441.

$59,950. $70,000. $124,950. $135,000.

Statements of Financial Accounting Standards No. 2, “Accounting for Research and Development Costs,” requires that all research and development expense be a. b. c. d.

capitalized and not amortized. capitalized and amortized over its economic life. capitalized and amortized over no less than 40 years. expensed in the year in which incurred. Page 144 © 2008 Institute of Certified Management Accountants


The best justification for expensing research and development costs is that a. b. c. d.

443.

Comprehensive income is best defined as a. b. c. d.

444.

net income excluding extraordinary gains and losses. the change in net assets for the period including contributions by owners and distributions to owners. total revenues minus total expenses. the change in net assets for the period excluding owner transactions.

Which one of the following would be excluded from Other Comprehensive Income reported for the current year? a. b. c. d.

445.

determining the activities to be included as part of research and development is a subjective process. the benefits derived from research and development efforts may later be sold to others outside of the company. it is difficult to determine if the assets used for research and development will have alternative future uses. the magnitude and timing of the future benefits received from research and development costs are difficult to determine.

Foreign currency translation adjustments. Foreign currency remeasurement gains or losses. Unrealized holding gains or losses on available-for-sale securities. Additional pension liability in excess of unrecognized prior service cost.

Martin Corporation has the following data related to its industry segments. Segment A B C D E Totals

Unaffiliated Revenues $ 90 70 40 250 300 $750

Intersegment Revenues $10 15 -030 20 $75

Operating Identifiable Profit (Loss) Assets $(100) $ 600 50 600 (20) 150 180 1,500 130 800 $240 $3,650

Based on the revenue criteria only, which of Martin’s segments are reportable? a. b. c. d.

Segments A, B, C, D, and E. Segments A, B, D, and E only. Segments A and D only. Segment E only. Page 145 © 2008 Institute of Certified Management Accountants


Hampton Inc. has identified the following six possible reporting segments. Segments Bingham Charles Harvey Norton Randall Wicker

Total Revenue $ 200,000 100,000 1,400,000 600,000 1,800,000 200,000 $4,300,000

Operating Profit $ 20,000 4,000 80,000 40,000 36,000 15,000 $195,000

Identifiable Assets $ 120,000 60,000 780,000 320,000 560,000 100,000 $1,940,000

Based on the standard quantitative tests, the Hampton segments that are significant and should be disclosed in the financial statements are a. b. c. d. 447.

A segment is considered significant if its sales, profits, or assets are a. b. c. d.

448.

5% or more of the respective total company amounts. 10% or more of the respective total company amounts. 15% or more of the respective total company amounts. 51% or more of the respective total company amounts.

In reporting results of the individual segments of a corporation, depreciation expense for each segment a. b. c. d.

449.

Bingham, Charles, Harvey, and Wicker. Harvey, Norton, and Randall. Charles, Norton, and Wicker. Bingham, Harvey, Norton, and Randall.

need not be separately identified. is excluded from the calculation of identifiable assets. is eliminated as a general corporate expense. must be separately identified.

According to Statements on Financial Accounting Standards No. 52, “Foreign Currency Translation,” a firm’s functional currency should be a. b.

selected on the basis of several economic factors including cash flow, sales price, and financing indicators. the currency of the foreign environment in which the firm primarily generates and expends cash. Page 146 © 2008 Institute of Certified Management Accountants

CMA Exam Retired Questions c. d.

450.

According to Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation,” the assets, liabilities, and operations of a foreign entity are to be measured using that entity’s functional currency. The functional currency of an entity is defined as the currency a. b. c. d.

451.

sale of new securities. regulation of securities already outstanding. establishment of the Securities and Exchange Commission. blue sky laws.

The provisions of the Securities Exchange Act of 1934 include all of the following except a. b. c. d.

453.

of the entity’s parent company. of the primary country in which the entity is physically located. in which the books of record are maintained for all entity operations. of the primary economic environment in which the entity operates.

The Securities Act of 1933 deals with the a. b. c. d.

452.

selected on the basis of cost-benefit analysis and ease of preparing consolidated financial statements. the currency of the parent organization as the firm operates as an extension of the parent’s operations.

requiring firms offering securities for public sale to file a registration statement and provide a prospectus to potential investors. requiring the registration of national securities exchanges and brokers dealing in over-the-counter markets. regulation of proxy solicitations for the election of directors or for approval of other corporate actions. requiring disclosure of all pertinent information in tender offer solicitations.

The objectives of the Securities Act of 1933 include all of the following except a. b. c. d.

to require that investors be provided with material information concerning securities offered for public sale. the prevention of misrepresentation, deceit, and other fraud in the sale of securities. to authorize the Board of Governors of the Federal Reserve System to control the use of margins in securities trading. to make certain that the investor has an opportunity to make choices on the basis of full disclosure of the pertinent facts. Page 147 © 2008 Institute of Certified Management Accountants


Following are items subject to disclosure to the Securities and Exchange Commission. I. II. III. IV.

Market for common equity. Related-party transactions. Executive compensation. Disagreements with accountants.

Which of these items must be disclosed in the Form 10-K Annual Reports? a. b. c. d. 455.

Which one of the following statements regarding Form 10-K annual reports is correct ? a. b. c. d.

456.

I and II only. III and IV only. I, II, and III only. I, II, III, and IV.

The market for the registrant's common equity must be disclosed. Selected five-year financial data must be included in the reports of most companies. Management’s discussion and analysis of the company’s financial condition and operating results is encouraged but not required. Executive compensation must be disclosed.

Corcoran Inc.’s common stock trades on the New York Stock Exchange. The past year was a disappointing one for Corcoran; cash flow, operating income, and net income were all significantly lower than in previous years. While discussing the financial results, Barbara Freeburg, an outside member of the Board of Directors, learned that Corcoran’s management has recorded large one-time expenses in the last quarter that related to warranty, bad-debt, environmental and other liabilities. Management provided adequate support for the large increase in the liabilities but Freeburg disagreed, believing that liabilities were materially overstated, and resigned from the Board of Directors. The large expenses recorded by Corcoran in the last quarter will be reported on a. b. c. d.

Form 10-Q for the fourth quarter. Form 10-K. Form 10-Q for the first quarter of next year. the next Form S-1.



The Securities and Exchange Commission (SEC) issues five major types of accountingrelated pronouncements. Regulation S-X a. b. c. d.

458.

The Securities and Exchange Commission requires the filing of Form 8-K under all of the following circumstances except a. b. c. d.

459.

Management’s Discussion and Analysis. proxy statements. comfort letters for underwriters. a prospectus.

Of the following information found in an annual report, which one is required by the Securities and Exchange Commission? a. b. c. d.

461.

a change in public accountants. bankruptcy or receivership. a minority investment in a competitor. the resignation of a director.

The Securities and Exchange Commission requires public companies to disclose of all of the following except a. b. c. d.

460.

provides interpretations and practices that are followed by the SEC in administering the disclosure requirements of federal securities laws. relates to enforcement activities and disciplinary sanctions imposed by the SEC. announces new rules, amends existing rules, and states the SEC position on matters relating to financial statements. prescribes the form and content of financial statements to be included in SEC regulation statements.

Discussion of management’s responsibility for the financial statements. Discussion of the company’s philanthropic endeavors and corporate citizenship. Environmental information that could affect the decisions of an informed investor. A financial forecast of the company’s expected financial position and results of operations.

Travis Corporation’s common stock trades on the New York Stock Exchange. The past year was a disappointing one for Travis; cash flow, operating income, and net income were all significantly lower than previous years. While discussing the financial results, C. J. Jones, an outside member of the Board of Directors, learned that Travis’ management had recorded large one-time expenses in the last quarter that related to Page 149 © 2008 Institute of Certified Management Accountants

CMA Exam Retired Questions warranty, bad-debt, environmental and other liabilities. Management provided adequate support for the large increase in the liabilities, but Jones disagreed, believing that liabilities were materially overstated, and resigned from the Board of Directors. Jones’ resignation from Travis’ Board of Directors requires Travis to file a. b. c. d. 462.

An auditor would most likely examine a lease agreement for computers used in a factory to support management’s assertion of a. b. c. d.

463.

Form 10-K with the Securities and Exchange Commission. Form 8-K with the Securities and Exchange Commission. Form 10-Q with the Securities and Exchange Commission. an Annual Report with the Financial Accounting Standards Board.

existence or occurrence. rights and obligations. valuation or allocation. completeness.

An auditor would obtain confirmation of inventories at locations outside the client’s facilities in order to support which of the following management assertions? I. II. III. IV. a. b. c. d.

464.

Existence or occurrence. Completeness. Valuation or allocation. Presentation and disclosure.

I and II only. II and IV only. I and III only. I, II, and III only.

An engagement to report on a company’s internal control structure over financial reporting can best be described as a(n) a. b. c. d.

consulting engagement to provide constructive advice to the company on its internal control structure. prospective engagement to report on the expected benefits of the company’s internal control structure. audit engagement to render an opinion on the company’s internal control structure. attestation engagement to report on a company’s written assertions about its internal control structure. Page 150 © 2008 Institute of Certified Management Accountants


Which one of the following documents would an auditor consider to be the most reliable? a. b. c. d.

466.

A search for unrecorded liabilities provides support for management’s financial statement assertion of a. b. c. d.

467.

A confirmation of inventory held by an independent warehouse sent to the auditor. A copy of a purchase order supported by a receiving report signed by the receiving clerk. A check issued by the client and endorsed by the payee included with the client’s bank reconciliation. A copy of an insurance policy supported by a canceled check endorsed by the insurance agency.

existence or occurrence. completeness. rights and obligations. valuation or allocation.

An auditor would test cutoff procedures for purchases, movements of goods through manufacturing, and sales to provide support concerning which of the following management assertions? I. II. III. IV. a. b. c. d.

468.

Existence or occurrence. Rights and obligations. Valuation or allocation. Presentation and disclosure.

I and II only. I and III only. II and IV only. III and IV only.

Under which one of the following circumstances would an independent auditor issue a disclaimer of opinion? a. b. c. d.

Nonconformity with a generally accepted accounting principle necessary for fair presentation in unusual circumstances. A scope limitation imposed by the client that is material to the financial statements taken as a whole. Financial statements not presented fairly because of nonconformity with generally accepted accounting principles. A scope limitation attributable to inadequate client records which does not affect the financial statements taken as a whole. Page 151 © 2008 Institute of Certified Management Accountants


Which one of the following situations would preclude the issuance of an unqualified audit report? a. b. c. d.

470.

The annual report of a public company must include all of the following except a. b. c. d.

471.

a description of accounting policies. the auditor’s policy recommendations. management’s discussion and analysis. the number of shares of stock outstanding.

An independent auditor’s report stating that the financial statements do not fairly present the information because of a lack of conformity with generally accepted accounting principles is a(n) a. b. c. d.

473.

an analysis of pertinent ratios and comparison with industry standards. disclosure of the causes of material changes in the financial statements as a whole. income from continuing operations per share and in total for five years. information on the effects of inflation and changing prices on the financial statements.

The annual report would include all of the following information except a. b. c. d.

472.

The comparability of the statements is affected by a change in accounting principle. The firm is facing a probable contingent loss, but the amount cannot be estimated. The auditor’s examination has been limited in scope. The firm has engaged in significant related-party transactions.

restricted opinion. negative opinion. adverse opinion. disclaimer.

Under which one of the following circumstances would an independent auditor issue an unqualified opinion with explanatory language? a. b. c. d.

Nonconformity with a generally accepted accounting principle necessary for fair presentation in unusual circumstances. A scope limitation imposed by the client that is material to the financial statements taken as a whole. Financial statements not presented fairly because of nonconformity with generally accepted accounting principles. A scope limitation attributable to inadequate client records that does not affect the financial statements taken as a whole. Page 152 © 2008 Institute of Certified Management Accountants


An adverse audit opinion would be issued if a firm a. b. c. d.

475.

The correct description of an unqualified opinion of financial statements is that the financial statements a. b. c. d.

476.

c. d.

The responsibilities for both management and the auditor are explicitly stated. Management’s responsibility is explicitly stated, while the auditor’s responsibility is implied. The responsibilities for both management and the auditor are implied. Management’s responsibility is implied, while the auditor’s responsibility is explicitly stated.

Circumstances that may lead an independent auditor to include an explanatory paragraph but nevertheless issue an unqualified report include all of the following except a. b. c. d.

478.

do not meet all of the quality requirements of the auditor who is issuing the opinion. present fairly, in all material aspects, the financial position of the company except for the matters identified in a separate paragraph. present fairly, in all material aspects, the financial position of the company. do not present fairly, in all material aspects, the financial position of the company.

How are management’s responsibility and the auditor’s responsibility represented in the standard auditor’s report? a. b.

477.

had prepared statements using the cash basis of accounting. was likely to lose a pending lawsuit seeking material damages. appeared unable to continue as a going concern. had changed methods of tracking inventory costs.

related party transactions. a pending lawsuit. inadequate disclosure. a lack of consistency.

An engagement letter should include all of the following except a. b. c. d.

a statement that a properly executed audit may not detect all material irregularities. a reference to the professional standards to which the auditor will adhere. the basis on which fees are computed and billing arrangements. an outline of the auditor’s responsibility for the financial statements. Page 153 © 2008 Institute of Certified Management Accountants


All of the following topics are likely to be addressed in the management discussion and analysis of the 10-K annual report except a. b. c. d.

480.

The Securities and Exchange Commission requires that the management discussion and analysis (MD&A) section of the annual report include a discussion of all of the following aspects of a business except a. b. c. d.

481.

liquidity. capital resources. market competitiveness. results of operations.

The Securities and Exchange Commission requires certain information be included in Management’s Discussion and Analysis (MD&A) in the 10K annual report. Discussion of all of the following is required except a. b. c. d.

482.

favorable trends in liquidity. significant events affecting capital resources. uncertainties affecting operations. management’s responsibility for the financial statements.

the results of operations. the effects of inflation and changing prices. forward-looking information and forecasts. significant events or uncertainties.

Which one of the following statements relating to the disclosure of corporate expectations about the future in the Management Discussion and Analysis Section of the 10K annual report is incorrect? a. b. c. d.

Financial forecasts are prospective financial statements that present what is expected to happen based on the preparer’s knowledge. Financial projections are prospective statements that present what might take place based on hypothetical assumptions made by the preparer. A summary of significant assumptions used in a forecast or projection must be disclosed. Safe harbor rules provide comprehensive protection for all erroneous projections.



Which one of the following is not a financial aspect covered in the Management Discussion and Analysis section of the Annual Report? a. b. c. d.

Analysis of current period profitability. Discussion of any management disagreements with the auditor’s opinion. Discussion of favorable or unfavorable trends concerning overall operations of management. Analysis of liquidity using both hard and soft data.


CMA Exam Retired Questions Answers – CMA Part 2 Practice Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43.

D D B A B C D D D D C D C A C D C D D D D D D B A D B C C B C D B C B A C B B C B C B

44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86.

D A C C B D D A A C D C D D A B B A C A A C C B A A B B C B C C C B C B C C D B A A B

87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129.

D B A A B C A A B D B C D D A B D B A A B B D A C C B A D D D C A C A A D A C D C C C


130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172.

D B B A C D B D A B D B C A A B D D C B B B C D D D C A A D B D B C C D D D B C D A B

CMA Exam Retired Questions 173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198. 199. 200. 201. 202. 203. 204. 205. 206. 207. 208. 209. 210. 211. 212. 213. 214. 215. 216. 217. 218.

D A C C B A D C B D A B C D A B D C B A D D A C A B C D C D B D C D C B D B B A D D D C C C

219. 220. 221. 222. 223. 224. 225. 226. 227. 228. 229. 230. 231. 232. 233. 234. 235. 236. 237. 238. 239. 240. 241. 242. 243. 244. 245. 246. 247. 248. 249. 250. 251. 252. 253. 254. 255. 256. 257. 258. 259. 260. 261. 262. 263. 264.

B B C D B B A D B C C B A A D D B C D B A A B C B D B B D D D D D D D D B B B B B B C C D C

265. 266. 267. 268. 269. 270. 271. 272. 273. 274. 275. 276. 277. 278. 279. 280. 281. 282. 283. 284. 285. 286. 287. 288. 289. 290. 291. 292. 293. 294. 295. 296. 297. 298. 299. 300. 301. 302. 303. 304. 305. 306. 307. 308. 309. 310.

C A D D B D D B B A A D A B C C B B D A D B B C B C C B B B C A A C B A D C B B A C A C B D


311. 312. 313. 314. 315. 316. 317. 318. 319. 320. 321. 322. 323. 324. 325. 326. 327. 328. 329. 330. 331. 332. 333. 334. 335. 336. 337. 338. 339. 340. 341. 342. 343. 344. 345. 346. 347. 348. 349. 350. 351. 352. 353. 354. 355. 356.

A B D A B D B B A D D C A B C A A A A A B C C B C B C C C C D A B A C A D D D C B D A A C C

CMA Exam Retired Questions 357. 358. 359. 360. 361. 362. 363. 364. 365. 366. 367. 368. 369. 370. 371. 372. 373. 374. 375. 376. 377. 378. 379. 380. 381. 382. 383. 384. 385. 386. 387. 388.

C B A D B A B B D B B D B B D C C C B A A D B B D D B C B D A C

389. 390. 391. 392. 393. 394. 395. 396. 397. 398. 399. 400. 401. 402. 403. 404. 405. 406. 407. 408. 409. 410. 411. 412. 413. 414. 415. 416. 417. 418. 419. 420.

D A A C B C C C D D A A D A B D B C C C C C D D D A D C B C D B

421. 422. 423. 424. 425. 426. 427. 428. 429. 430. 431. 432. 433. 434. 435. 436. 437. 438. 439. 440. 441. 442. 443. 444. 445. 446. 447. 448. 449. 450. 451. 452.

C D A A C B D D C B A C C C C B B A B B D D D B B D B D A D A A


453. 454. 455. 456. 457. 458. 459. 460. 461. 462. 463. 464. 465. 466. 467. 468. 469. 470. 471. 472. 473. 474. 475. 476. 477. 478. 479. 480. 481. 482. 483.

C D C B D C C C B B A D A B A B C A B C A A C A C D D C C D B


Other Study Resources Part 2 - Management Accounting and Reporting Budget Preparation Blocher, Edward J., Chen, Kung, H., and Lin, Thomas W., Cost Management: A Strategic Emphasis, 3 edition, Irwin/McGraw Hill, New York, NY 2004. rd

Horngren, Charles T., Foster, George, and Datar, Srikant M., Cost Accounting: A Managerial Emphasis, 12 edition, Prentice-Hall Inc., Upper Saddle River, NJ, 2006. th

Cost Management Blocher, Edward J., Chen, Kung, H., and Lin, Thomas W., Cost Management: A Strategic Emphasis, 3 edition, Irwin/McGraw Hill, New York, NY 2004. rd


Information Management Moscove, Stephen A., Simkin, Mark G., and Bagranoff, Nancy A., Core Concepts of Accounting Information Systems, 8 edition, John Wiley & Sons Inc., New York, NY, 2003. th

th

Bodnar, George H., Hopwood, William S., Accounting Information Systems, 9 edition, Prentice Hall-Latest Edition, Upper Saddle River, NJ, 2003. O’Brien, James A. & Marakas, George M. , Introduction to Information Systems, 13 edition, Irwin/McGraw-Hill Publishers, Barr Ridge, IL, 2007.

th

Performance Management Blocher, Edward J., Chen, Kung, H., and Lin, Thomas W., Cost Management: A Strategic Emphasis, 3 edition, Irwin/McGraw Hill, New York, NY 2004. rd


th

Evans, James R., Lindsay, William M., The Management and Control of Quality, 5 edition, South-Western, Cincinnati, OH, 2002. Page 159 © 2008 Institute of Certified Management Accountants

CMA Exam Retired Questions External Financial Reporting Kieso, Donald E., Weygandt, Jerry J., and Warfield, Terry D., Intermediate Accounting, 12 edition, John Wiley & Sons, New York, NY, 2007. th

th

Nikolai, Loren A., and Bazley, John D., Intermediate Accounting, 9 edition, SouthWestern Publishing Company, Boston, MA, 2007. th

Larsen, E. John, Modern Advanced Accounting, 9 edition, McGraw-Hill\Irwin Book Co., New York, NY, 2003.


Part 2 Newly Released Questions Mgt Accting Reporting

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