Question 1:

2A1-AT03

When preparing common-size statements, items on the Balance Sheet are generally stated
as a percentage of __________ and items on the Income Statement are generally stated as
a percentage of __________.
total assets; net income.
total shareholders' equity; net income.
total shareholders' equity; net sales.
total assets; net sales.

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-LS02

A common-size statement is helpful:

for determining the next investment the company should make.
for considering whether to buy or sell assets.
in comparing companies of different sizes.
for figuring out how assets are allocated.

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-LS08

The 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-LS09

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

*Source: Retired ICMA CMA Exam Questions.

gains and losses.

shareholders' equity.
expenses.
revenue.

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-LS19

When 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-AT01

Gordon 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 can best be characterized by which one of these statements?
The common-size gross profit percentage has decreased as a result of an increasing common-size
trend in cost of goods sold.
The increased trend in the common-size gross profit percentage is the result of both the increasing
trend in sales and the decreasing trend in cost of goods sold.
The common-size trend in cost of goods sold is decreasing which is resulting in an increasing trend
in the common-size gross profit percentage.

The common-size trend in sales is increasing and is resulting in an increasing trend in the commonsize 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-LS12

The 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-LS06

When 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-CQ04

Pierre Company had the following transactions during the fiscal year ending December 31,
year 3:

 Sold a delivery van with a net book value of $5,000 for $6,000 cash, reporting a
gain of $1,000.
Paid interest to bondholders for the amount of $275,000.
Declared dividends on December 31, year 3, of $.08 per share on the 1.3 million
shares outstanding, payable to shareholders of record on January 31, year 4. No
dividends were declared or paid in prior years.
Accounts receivable decreased from $70,000 on December 31, year 2 to $60,000
on December 31, year 3.
Accounts payable increased from $40,000 on December 31, year 2 to $45,000 on
December 31, year 3.
The cash balance was $150,000 on December 31, year 2, and $177,500 on
December 31, year 3
Pierre Company prepared its statement of cash flows using the direct method on December
31, year 3. The interest paid to bondholders is reported:
As an outflow of cash in the investing activities section.
As an outflow of cash in the operating activities section.
As an outflow of cash in the financing activities section.
As an outflow of cash in the debt servicing activities section.

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-LS01

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

Common-size statements indexed over two years for two companies, with both showing a 10%
increase in profits, show that both companies would make equally attractive investments.
All of the other three answers are correct.
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-LS17

The most commonly used method for calculating and reporting a company's net cash flow
from operating activities on its statement of cash flows is the:
*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-LS13

A 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-CQ02

Silver Streak Enterprises (SSE) began manufacturing latex-based paint in 1978. In 2008, the
company developed a new high quality paint which maintains its luster for over 50 years.
Due to the success of this new product, sales of the original latex-based paint have declined
significantly such that the company has decided to phase out the product in early 2009.
Mikayla Andrews is the accounting manager and her primary responsibilities include the
preparation and analysis of the annual financial statements. Mikayla has begun analyzing
the annual financial transactions and wants to ensure that the operations are presented

accurately for the fiscal year ending December 31, 2009. The following transactions have
raised questions for Mikayla:
1. SSE invented its new high quality paint in 2008 and received a patent in the same year. In
2008, the company expected that the new patent would have a useful-life of ten years;
however, due to innovations by its competitors, SSE has determined that the useful-life of
the patent will be reduced to six years beginning in 2009.
2. The year-end physical count of inventory has found $24,000 of the obsolete latex-based
paint product which must be written off as obsolete.
3. SSE is a defendant in a lawsuit concerning the durability of its old paint product line.
Corporate lawyers believe that the lawsuit against Silver Streak will probably result in a
settlement of $50,000 in mid-2010.
4. Silver Streak is also a plaintiff in a lawsuit against a competitor for stealing the
manufacturing process of their new product line. Corporate lawyers believe that the lawsuit
could likely result in a favorable judgment in the amount of $150,000 in 2010.
Explain how each of the four transactions above will affect Silver Streak's Income Statement:
Transaction 1 would decrease operating income. Transaction 2 would be classified as an other
expense and would decrease Income Before Taxes. Transaction 3 is a loss contingency that can be
reasonably estimated and would appear on the income statement. Transaction 4 is a gain
contingency that can be reasonably estimated and would be recorded on the income statement.
Transaction 1 would decrease operating income. Transaction 2 would be classified as a cost of
goods sold and would decrease operating income. Transaction 3 is a loss contingency that can be
reasonably estimated and would appear on the income statement. Transaction 4 is a contingency
that may result in a gain and would be recorded in the financial statements.
Transaction 1 would decrease operating income. Transaction 2 would be classified as an other
expense and would decrease Income Before Taxes. Transaction 3 is a loss contingency that may
result in a settlement and should appear in the notes but not in the financial statements. Transaction
4 is a contingency that may result in a gain but will not be recorded in the financial statements.
Transaction 1 would decrease operating income. Transaction 2 would classified as other expense
and decrease Income Before Taxes. Transaction 3 is a loss contingency that can be reasonably
estimated and would appear on the income statement. Transaction 4 is a contingency that may
result in a gain but would not be recorded in the financial statements.

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-LS05

The 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-LS11

All 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-CQ03

Which of the following financial statement changes would best represent the impact of
incurring and paying interest on a note payable for the period:
Effect on Equity Section of the Balance Sheet: No effect
Statement of Cash Flows Direct Method: Outflow from Operating Activities.
Effect on Equity Section of the Balance Sheet: Decrease
Statement of Cash Flows Direct Method: Outflow from Operating Activities.

Effect on Equity Section of the Balance Sheet: No effect

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

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-CQ08

At the end of the current fiscal year, XL Company reported net income of $40,000. In
addition, the following information is available.

Using the indirect method, what amount should be reported as cash flow from financing
activities on XL's Statement of Cash Flows for the current fiscal year?
($6,500).
($9,500).
($39,500).
($20,500).

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-AT02

In assessing the financial prospects for a firm, financial analysts use various techniques. An
example of vertical, common-size analysis is:

a comparison in financial form between two or more firms in different industries.

a comparison in financial ratio form between two or more firms in the same industry.
advertising expense is 2 percent of sales.
an assessment of the relative stability of a firm's level of vertical integration.

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-LS15

Which 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-AT04

Gordon has had the following financial results for the last four years.

Which one of the following is the most likely conclusion you can draw from this information?
Gordon should consider raising prices because the cost of goods sold (COGS) has gone up faster
than sales.
Gordon should seek additional outlets for its goods to increase profitable sales.
Customers continue to see Gordon's products as a good value for the price.

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)/$1,250,000
Change 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 Profit
Gross 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-LS14

Kelli Company acquired land by assuming a mortgage for the full acquisition cost. This
transaction should be disclosed on Kelli's Statement of Cash Flows as a(n):
*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-AT05

The controller of OmniCorp asked a financial analyst to calculate common size financial
statements for the past four years. The controller is most likely looking for which of the
following?

How the company is earning its profits.

The growth rate for sales.
Trends in expenses as a percentage of sales.
How efficiently the company is using assets.

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-CQ06

Pierre Company had the following transactions during the fiscal year ending December 31,
year 3:
Sold a delivery van with a net book value of $5,000 for $6,000 cash, reporting a
gain of $1,000.
Paid interest to bondholders for the amount of $275,000
Declared dividends on December 31, year 3, of $.08 per share on the 1.3 million
shares outstanding, payable to shareholders of record on January 31, year 4. No
dividends were declared or paid in prior years.
Accounts receivable decreased from $70,000 on December 31, year 2 to $60,000
on December 31, year 3.
Accounts payable increased from $40,000 on December 31, year 2 to $45,000 on
December 31, year 3.The cash balance was $150,000 on December 31, year 2,
and $177,500 on December 31, year 3
What is the net effect of taking the total cash provided (used) by operating activities, adding
it to the cash provided (used) by investing activities, and adding that to the cash provided
(used) by financing activities?
Positive cash flow of $27,500.
Negative cash flow of $371,000.
Positive cash flow of $22,500.
Negative cash flow of $366,000.

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-LS20

Stanford Company leased some special-purpose equipment from Vincent Inc. under a longterm lease that was treated as an operating lease by Stanford. After the financial statements
for the year had been issued, it was discovered that the lease should have been treated as a
capital lease by Stanford. All of the following measures relating to Stanford would be
affected by this discovery except the:
*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-CQ01

Gordon 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 can best be characterized by which one of the following
statements?
The common-size trend in sales is increasing and is resulting in an increasing trend in the commonsize 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-LS16

All 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-CQ09

An item of inventory purchased for $30 had been incorrectly written down at the end of last
year to a current replacement cost of $22. The item is currently selling for $60, its normal
selling price. The error will affect the financial statements in which of the following ways?
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-LS18

The presentation of the major classes of operating cash receipts (such as receipts from
customers) less the major classes of operating cash disbursements (such as cash paid for
merchandise) is best described as the:
*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-LS04

Which one of the following would result in a decrease to cash flow in the indirect method of
preparing a statement of cash flows?
*Source: Retired ICMA CMA Exam. Questions.

Decrease in income taxes payable.

Proceeds from the issuance of common stock.
Amortization expense.
Decrease in inventories.

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-LS03

The 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-LS10

Dividends 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-LS07

A 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-CQ07

At the end of the current fiscal year, XL Company reported net income of $40,000. In
addition, the following information is available:

Using the indirect method, what amount should be reported as cash flow from 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-CQ05

Pierre Company had the following transactions during the fiscal year ending December 31,
year 3:
Sold a delivery van with a net book value of $5,000 for $6,000 cash, reporting a
gain of $1,000.
Paid interest to bondholders for the amount of $275,000
Declared dividends on December 31, year 3, of $.08 per share on the 1.3 million
shares outstanding, payable to shareholders of record on January 31, year 4. No
dividends were declared or paid in prior years.
Accounts receivable decreased from $70,000 on December 31, year 2 to $60,000
on December 31, year 3.
Accounts payable increased from $40,000 on December 31, year 2 to $45,000 on
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.