Question 1:2A1-AT03When preparing common-size statements, items on the Balance Sheet are generally stated as a percentage of __________ and items on the Income Statement are generally stated as a percentage of __________.total assets; net income.

total shareholders' equity; net income.

total shareholders' equity; net sales.

total assets; net sales.

Common-size balance sheets express all assets, liabilities, and equities as a percent of the balance sheet footing (total assets). Common-size income statements express all sales adjustments, expenses, gains, losses, other revenues, and taxes as a percent of sales.Question 2:2A1-LS02A common-size statement is helpful:for determining the next investment the company should make.

for considering whether to buy or sell assets.

in comparing companies of different sizes.

for figuring out how assets are allocated.

A common-size statement shows each major section of the financial statement valued at 100%, with its elements as percentages of the total, and is helpful when comparing companies of different sizes and when making comparisons from one year to another within the same company.Question 3:2A1-LS08The financial statement that provides a summary of the firm's operations for a period of time is the:

*Source: Retired ICMA CMA Exam Questions.statement of financial position.

statement of retained earnings.

statement of shareholders' equity.

income statement.

The financial statement that provides a summary of the firm's operations for a period of time is the income statement. It shows revenues, expenses, gains, losses, and taxes for the period.Question 4:2A1-LS09All of the following are elements of an income statement except:

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

shareholders' equity.

expenses.

revenue.

Shareholders' equity does not appear on an income statement. It appears on the balance sheet. Revenue, expenses, gains and losses all appear on an income statement.Question 5:2A1-LS19When a fixed asset is sold for less than book value, which one of the following will decrease?

*Source: Retired ICMA CMA Exam Questions.Current ratio.

Total current assets.

Net working capital.

Net profit.

When a fixed asset is sold for less than book value, a loss occurs decreasing net profit.Question 6:2A1-AT01Gordon has had the following financial results for the last four years.

Gordon has analyzed these results using vertical common-size analysis to determine trends. The performance of Gordon canbestbe characterized by which one of these statements?The common-size gross profit percentage has decreased as a result of an increasing common-size trend in cost of goods sold.

The increased trend in the common-size gross profit percentage is the result of both the increasing trend in sales and the decreasing trend in cost of goods sold.

The common-size trend in cost of goods sold is decreasing which is resulting in an increasing trend in the common-size gross profit percentage.

The common-size trend in sales is increasing and is resulting in an increasing trend in the common-size gross profit margin.

The table below shows that the common-size gross profit percentage has decreased as a result of an increasing common-size trend in cost of goods sold.

Question 7:2A1-LS12The sale of available-for-sale securities should be accounted for on the statement of cash flows as a(n):

*Source: Retired ICMA CMA Exam Questions.investing activity.

financing activity.

noncash investing and financing activity.

operating activity.

Cash inflows and outflows from securities will accounted for in the statement of cash flows as an operating activities to its readily marketable function. However, may be included in either operating or investing activities, based on the nature and purpose of the securities.Question 8:2A1-LS06When using the statement of cash flows to evaluate a company's continuing solvency, the most important factor to consider is the cash:

*Source: Retired ICMA CMA Exam Questions.flows from (used for) investing activities.

balance at the end of the period.

flows from (used for) operating activities.

flows from (used for) financing activities.

When using the statement of cash flows to evaluate a company's continuing solvency, the most important factor to consider is the cash flows from (used for) operating activities since over time, cash flow from operations has to cover everything.Question 9:2A1-CQ04Pierre Company had the following transactions during the fiscal year ending December 31, year 3: Sold a delivery van with a net book value of $5,000 for $6,000 cash, reporting a gain of $1,000. Paid interest to bondholders for the amount of $275,000. Declared dividends on December 31, year 3, of $.08 per share on the 1.3 million shares outstanding, payable to shareholders of record on January 31, year 4. No dividends were declared or paid in prior years. Accounts receivable decreased from $70,000 on December 31, year 2 to $60,000 on December 31, year 3. Accounts payable increased from $40,000 on December 31, year 2 to $45,000 on December 31, year 3. The cash balance was $150,000 on December 31, year 2, and $177,500 on December 31, year 3Pierre Company prepared its statement of cash flows using the direct method on December 31, year 3. The interest paid to bondholders is reported:As an outflow of cash in the investing activities section.

As an outflow of cash in the operating activities section.

As an outflow of cash in the financing activities section.

As an outflow of cash in the debt servicing activities section.

This is a payment of interest on a debt obligation, the payment of interest to bondholders is considered a cash outflow from an operating activity.Question 10:2A1-LS01Which of the following statements is true regarding common-size statements?Common-size statements indexed over two years for two companies, with both showing a 10% increase in profits, show that both companies would make equally attractive investments.

All of the other three answers are correct.

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

Horizontal common-size statements can be made only for companies with at least ten years of operational data.

Common-size statements showing a 10% increase in profits for two companies do not alone indicate that both are equally attractive investments. One of the companies may have shown an increase in profits from $10 to $11, while the other may have shown an increase in profits from $1,000,000 to $1,100,000. Horizontal common-size statements do not require ten years of data.Question 11:2A1-LS17The 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:

*Source: Retired ICMA CMA Exam Questions.direct method.

single-step method.

multiple-step method.

indirect method.

The most commonly used method for calculating and reporting a company's net cash flow from operating activities on its statement of cash flows is the indirect method. The direct method is rarely used because when it is used, the indirect method must be disclosed, However, use of the indirect method does not require disclosure of the direct method.Question 12:2A1-LS13A statement of cash flows prepared using the indirect method would have cash activities listed in which one of the following orders?

*Source: Retired ICMA CMA Exam Questions.Operating, investing, financing.

Investing, financing, operating.

Financing, investing, operating.

Operating, financing, investing.

A statement of cash flows prepared using the indirect method would have cash activities listed first as operating, next as investing, and third as financing.Question 13:2A1-CQ02Silver Streak Enterprises (SSE) began manufacturing latex-based paint in 1978. In 2008, the company developed a new high quality paint which maintains its luster for over 50 years. Due to the success of this new product, sales of the original latex-based paint have declined significantly such that the company has decided to phase out the product in early 2009.Mikayla Andrews is the accounting manager and her primary responsibilities include the preparation and analysis of the annual financial statements. Mikayla has begun analyzing the annual financial transactions and wants to ensure that the operations are presented accurately for the fiscal year ending December 31, 2009. The following transactions have raised questions for Mikayla:1. SSE invented its new high quality paint in 2008 and received a patent in the same year. In 2008, the company expected that the new patent would have a useful-life of ten years; however, due to innovations by its competitors, SSE has determined that the useful-life of the patent will be reduced to six years beginning in 2009.2. The year-end physical count of inventory has found $24,000 of the obsolete latex-based paint product which must be written off as obsolete.3. SSE is a defendant in a lawsuit concerning the durability of its old paint product line. Corporate lawyers believe that the lawsuit against Silver Streak will probably result in a settlement of $50,000 in mid-2010.4. Silver Streak is also a plaintiff in a lawsuit against a competitor for stealing the manufacturing process of their new product line. Corporate lawyers believe that the lawsuit could likely result in a favorable judgment in the amount of $150,000 in 2010.Explain how each of the four transactions above will affect Silver Streak's Income Statement:Transaction 1 would decrease operating income. Transaction 2 would be classified as an other expense and would decrease Income Before Taxes. Transaction 3 is a loss contingency that can be reasonably estimated and would appear on the income statement. Transaction 4 is a gain contingency that can be reasonably estimated and would be recorded on the income statement.

Transaction 1 would decrease operating income. Transaction 2 would be classified as a cost of goods sold and would decrease operating income. Transaction 3 is a loss contingency that can be reasonably estimated and would appear on the income statement. Transaction 4 is a contingency that may result in a gain and would be recorded in the financial statements.

Transaction 1 would decrease operating income. Transaction 2 would be classified as an other expense and would decrease Income Before Taxes. Transaction 3 is a loss contingency that may result in a settlement and should appear in the notes but not in the financial statements. Transaction 4 is a contingency that may result in a gain but will not be recorded in the financial statements.

Transaction 1 would decrease operating income. Transaction 2 would classified as other expense and decrease Income Before Taxes. Transaction 3 is a loss contingency that can be reasonably estimated and would appear on the income statement. Transaction 4 is a contingency that may result in a gain but would not be recorded in the financial statements.

Transaction 1: The change in useful life is a change in estimates that affects present and future periods only. There will be an increase in amortization that would be reported in operating expenses thus causing a decline in operating income. Change in amortizations will be reflected on current and future financial statements.Transaction 2: As there is obsolete inventory, the category other expense is affected on the income statement.Transaction 3: This loss contingency is probable and can be reasonably estimated, and therefore should appear on the income statement as an other gain or loss. This loss contingency should also appear in the footnotes to the financial statements.Transaction 4: According to SFAS 5 Accounting for Contingencies, contingencies that may result in gains are usually not reflected in the financial statements. Therefore, since the financial impact would not be realizable until received, not including the potential gain from the lawsuit in the financial statements is the proper handling for this year.Question 14:2A1-LS05The statement of shareholders' equity shows a:

*Source: Retired ICMA CMA Exam Questions.reconciliation of the beginning and ending balances in the Retained Earnings account.

reconciliation of the beginning and ending balances in shareholders' equity accounts.

computation of the number of shares outstanding used for earnings per share calculations.

listing of all shareholders' equity accounts and their corresponding dollar amounts.

The purpose of the statement of shareholders' equity is to reconcile the beginning and ending balances in shareholders' equity accounts.Question 15:2A1-LS11All of the following are classifications on the Statement of Cash Flows except:

*Source: Retired ICMA CMA Exam Questions.investing activities.

equity activities.

operating activities.

financing activities.

The classifications on the Statement of Cash Flows are operating activities, investing activities and financing activities.Question 16:2A1-CQ03Which of the following financial statement changes would best represent the impact of incurring and paying interest on a note payable for the period:Effect on Equity Section of the Balance Sheet:No effectStatement of Cash Flows Direct Method:Outflow from Operating Activities.

Effect on Equity Section of the Balance Sheet:DecreaseStatement of Cash Flows Direct Method:Outflow from Operating Activities.

Effect on Equity Section of the Balance Sheet:No effectStatement of Cash Flows Direct Method:Outflow from Financing Activities.

Effect on Equity Section of the Balance Sheet:DecreaseStatement of Cash Flows Direct Method:Outflow from Financing Activities.

Interest incurred during the reporting period on a note payable is considered an interest expense on the income statement which reduces net income, and in turn, decreases the equity section of the balance sheet. Interest expense paid is considered an operating activity as it is used to pay for the day-to-day operating activities of the organization. Therefore, for statement of cash flow purposes, interest expense paid would be classified as an outflow from operating activities.Question 17:2A1-CQ08At the end of the current fiscal year, XL Company reported net income of $40,000. In addition, the following information is available.Using the indirect method, what amount should be reported as cash flow from financing activities on XL's Statement of Cash Flows for the current fiscal year?($6,500).

($9,500).

($39,500).

($20,500).

The cash flow provided from financing activities is computed by taking the Increase in notes payable of $1,500, adding the increase in additional paid-in capital of $3,000, less the decrease in long-term debt of $12,000, plus the increase in common stock of $1,000, less the entire amount of the cash dividends paid (not the increase/decrease from prior year) of $33,000.Question 18:2A1-AT02In assessing the financial prospects for a firm, financial analysts use various techniques. An example of vertical, common-size analysis is:a comparison in financial form between two or more firms in different industries.

a comparison in financial ratio form between two or more firms in the same industry.

advertising expense is 2 percent of sales.

an assessment of the relative stability of a firm's level of vertical integration.

Vertical analysis looks at all items in the income statement (sales adjustments, expenses, gains, losses, other revenues, and taxes) and will include a column which shows these items as a percent of sales. This approach allows the analyst to compare the income statements of different size companies, since the comparison will be done on a percentage basis, rather than on an absolute dollar basis.Question 19:2A1-LS15Which one of the following should be classified as an operating activity on the statement of cash flows?

*Source: Retired ICMA CMA Exam Questions.The purchase of additional equipment needed for current production.

A decrease in accounts payable during the year.

The payment of a cash dividend from money arising from current operations.

An increase in cash resulting from the issuance of previously authorized common stock.

A decrease in accounts payable during the year should be classified as an operating activity on the statement of cash flows. The proceeds from the issuance of stock and the payment of a dividend are financing activities. Purchase of equipment is an investing activity.Question 20:2A1-AT04Gordon has had the following financial results for the last four years.

Which one of the following is themostlikely conclusion you can draw from this information?Gordon should consider raising prices because the cost of goods sold (COGS) has gone up faster than sales.

Gordon should seek additional outlets for its goods to increase profitable sales.

Customers continue to see Gordon's products as a good value for the price.

The sales growth may have been caused by inflation, not more effective marketing.

Over the four-year time span shown for this problem, sales have increased by 12%, which is calculated as:Change in sales = (Sales, year 4 Sales, year 1)/(Sales, year 1)Change in sales = ($1,400,000 $1,250,000)/$1,250,000Change in sales = $150,000/$1,250,000 = 0.12 or 12%During this same time period, cost of goods sold has increased by 13.3%, which is calculated as:Change in COGS = (COGS, year 4 COGS, year 1)/(COGS, year 1)Change in COGS = ($850,000 $750,000)/$750,000 = $100,000/$750,000 = 0.133 or 13.3%

These changes have resulted in Gordon's gross profit percentage (gross profit as a percentage of sales) dropping from 40% in Year 1 to 39.3% in Year 4.Gross profit percentage = Sales / Gross ProfitGross profit percentage, Year 1 = $500,000/$1,250,000 = 0.4 or 40%Gross profit percentage, Year 4 = $550,000/$1,400,000 = 0.393 or 39.3%

In order to compensate for the decrease in the gross profit percentage, Gordon will have to consider raising prices as well as reducing its product costs.Question 21:2A1-LS14Kelli 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):

*Source: Retired ICMA CMA Exam Questions.operating activity.

noncash financing and investing activity.

financing activity.

investing activity.

Acquiring a mortgage would require a noncash financing disclosure on the statement of cash flows. The land itself is an investment and would be accounted for as an investing activity.Question 22:2A1-AT05The controller of OmniCorp asked a financial analyst to calculate common size financial statements for the past four years. The controller ismostlikely looking for which of the following?How the company is earning its profits.

The growth rate for sales.

Trends in expenses as a percentage of sales.

How efficiently the company is using assets.

Common size financial statements look at each element in the statement as a percentage of another total amount. Common size income statements show expenses as a percent of sales, while common size balance sheets show assets, liabilities, and equities as a percent of total assets. A series of common size income statements will show trends in expenses as a percentage of sales.Question 23:2A1-CQ06Pierre Company had the following transactions during the fiscal year ending December 31, year 3: Sold a delivery van with a net book value of $5,000 for $6,000 cash, reporting a gain of $1,000. Paid interest to bondholders for the amount of $275,000 Declared dividends on December 31, year 3, of $.08 per share on the 1.3 million shares outstanding, payable to shareholders of record on January 31, year 4. No dividends were declared or paid in prior years. Accounts receivable decreased from $70,000 on December 31, year 2 to $60,000 on December 31, year 3. Accounts payable increased from $40,000 on December 31, year 2 to $45,000 on December 31, year 3.The cash balance was $150,000 on December 31, year 2, and $177,500 on December 31, year 3What is the net effect of taking the total cash provided (used) by operating activities, adding it to the cash provided (used) by investing activities, and adding that to the cash provided (used) by financing activities?Positive cash flow of $27,500.

Negative cash flow of $371,000.

Positive cash flow of $22,500.

Negative cash flow of $366,000.

The total cash provided (used) by the three activities (operating, investing, and financing) should equal the increase or decrease in cash for the year. The difference between the beginning balance of cash of $150,000, and the ending balance of cash of $177,500 is equal to $27,500.Question 24:2A1-LS20Stanford Company leased some special-purpose equipment from Vincent Inc. under a long-term lease that was treated as an operating lease by Stanford. After the financial statements for the year had been issued, it was discovered that the lease should have been treated as a capital lease by Stanford. All of the following measures relating to Stanford would be affected by this discovery except the:

*Source: Retired ICMA CMA Exam Questions.accounts receivable turnover.

net income percentage.

debt/equity ratio.

fixed asset turnover.

The accounts receivable turnover is sales divided by the average accounts receivable balance. The classification of a lease would not affect either sales or accounts receivable.Question 25:2A1-CQ01Gordon has had the following financial results for the last four years.

Gordon has analyzed these results using vertical common-size analysis to determine trends. The performance of Gordon canbestbe characterized by which one of the following statements?The common-size trend in sales is increasing and is resulting in an increasing trend in the common-size gross profit margin.

The increased trend in the common-size gross profit percentage is the result of both the increasing trend in sales and the decreasing trend in cost of goods sold.

The common-size gross profit percentage has decreased as a result of an increasing common-size trend in cost of goods sold.

The common-size trend in cost of goods sold is decreasing which is resulting in an increasing trend in the common-size gross profit percentage.

Gross profit percentage is calculated as:Gross profit percentage = (gross profit) / (sales)Gross profit percentage in year 1 = $500,000 / $1,250,000 = 40%Gross profit percentage in year 2 = $515,000 / $1,300,000 = 39.6%Gross profit percentage in year 3 = $534,000 / $1,359,000 = 39.3%Gross profit percentage in year 4 = $550,000 / $1,400,000 = 39.3%The decrease in gross profit percentage is caused by an increasing common-size (percent of sales) trend in cost of goods sold.Question 26:2A1-LS16All of the following are limitations to the information provided on the statement of financial position except the:

*Source: Retired ICMA CMA Exam Questions.judgments and estimates used regarding the collectability, salability, and longevity of assets.

lack of current valuation for most assets and liabilities.

omission of items that are of financial value to the business such as the worth of the employees.

quality of the earnings reported for the enterprise.

Earnings for the enterprise are reported on the income, not the statement of financial position (i.e. the balance sheet).Question 27:2A1-CQ09An item of inventory purchased for $30 had been incorrectly written down at the end of last year to a current replacement cost of $22. The item is currently selling for $60, its normal selling price. The error will affect the financial statements in which of the following ways?The income for this year will be overstated.

The income for this year will be unaffected.

The cost of sales for this year will be overstated.

The income for last year is overstated.

Since the inventory item had been incorrectly valued at $22 instead of $30 at the end of the previous year, the current-year cost would have been lower by $8, resulting in higher (overstated) net income for the year. Income for the prior year was correspondingly understated.Question 28:2A1-LS18The 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:

*Source: Retired ICMA CMA Exam Questions.indirect method of calculating net cash provided or used by operating activities.

cash method of determining income in conformity with generally accepted accounting principles.

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

format of the statement of cash flows.

The direct method of calculating net cash provided or used by operating activities presents 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).Question 29:2A1-LS04Which one of the following would result in a decrease to cash flow in the indirect method of preparing a statement of cash flows?

*Source: Retired ICMA CMA Exam. Questions.Decrease in income taxes payable.

Proceeds from the issuance of common stock.

Amortization expense.

Decrease in inventories.

When using the indirect method, a decrease to cash flow would occur when a business pays off its liabilities; therefore, a decrease in income taxes payable would result in a decrease to cash when using the indirect method.Question 30:2A1-LS03The financial statements included in the annual report to the shareholders are least useful to which one of the following?

*Source: Retired ICMA CMA Exam Questions.Competing businesses.

Stockbrokers.

Managers in charge of operating activities.

Bankers preparing to lend money.

Generally, the financial statements included in the annual report to the shareholders are most useful to external stakeholders such as stockbrokers, bankers preparing to lend money, and competing businesses. Therefore, these reports are least useful to managers in charge of operating activities.Question 1:2A1-LS10Dividends paid to company shareholders would be shown on the statement of cash flows as:

*Source: Retired ICMA CMA Exam Questions.cash flows from investing activities.

operating cash inflows.

cash flows from financing activities.

operating cash outflows.

Dividends paid to company shareholders would be shown on the statement of cash flows as cash flows from financing activities. Financing activities include all long-term debt and shareholders' equity transactions.Question 2:2A1-LS07A statement of financial position provides a basis for all of the following except:

*Source: Retired ICMA CMA Exam Questions.evaluating capital structure.

assessing liquidity and financial flexibility.

determining profitability and assessing past performance.

computing rates of return.

A statement of financial position provides a basis for computing rates of return, evaluating capital structures, and assessing liquidity and financial flexibility. The income statement determines profitability and assesses past performance.Question 3:2A1-CQ07At the end of the current fiscal year, XL Company reported net income of $40,000. In addition, the following information is available:

Using the indirect method, what amount should be reported as cash flow from operating activities on XL's Statement of Cash Flows for the current fiscal year?$47,500.

$49,500.

$32,500.

$34,500.

The cash flow provided from operating activities is computed by taking the net income of $40,000, less the increase in accounts receivable of $3,000 and less the prepaid expenses increase of $1,500, plus the decrease inventories of $4,500, plus the increase in accounts payable of $7,500.Question 4:2A1-CQ05Pierre Company had the following transactions during the fiscal year ending December 31, year 3: Sold a delivery van with a net book value of $5,000 for $6,000 cash, reporting a gain of $1,000. Paid interest to bondholders for the amount of $275,000 Declared dividends on December 31, year 3, of $.08 per share on the 1.3 million shares outstanding, payable to shareholders of record on January 31, year 4. No dividends were declared or paid in prior years. Accounts receivable decreased from $70,000 on December 31, year 2 to $60,000 on December 31, year 3. Accounts payable increased from $40,000 on December 31, year 2 to $45,000 on December 31, year 3. The cash balance was $150,000 on December 31, year 2, and $177,500 on December 31, year 3.Which of the answers below describes the correct entry for Pierre Company's statement of cash flows on December 31, year 3 using the indirect method?The decrease of $10,000 in accounts receivable is reported as a $10,000 decrease in the operating section of the statement of cash flows.

The $104,000 dividend payout is represented as an outflow of funds in the financing section.

Financing activities include the $1,000 gain from the sale of the delivery van.

The $1,000 gain from the sale of the delivery van is included in operating activities as a deduction.

Under the indirect method of cash flow statement preparation, net operating cash flow is determined by adjusting net income. Using the indirect method, the full $6,000 received for the asset sale is included in the investing activities section. Since the $1,000 gain is already included in net income it must be deducted so as not to be double counted.