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CMA 2015 Testbank Part 1 > Section-Specific Tests > Review 40

Answered Questions[ Guest Access ]
Time Spent: 5:40
(recorded 10/28/14 9:57pm)
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Score: 17%
40 Answered
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Question 1:
1A2-W007

Warner Machines missed recording purchases worth $10,000 in the

current year's income statement. While finalizing the financial
statements, the company's accountant detected the error and partially
corrected it. Under which of the following situations will the company
report lower than actual net income?

If the accountant has reduced cash by $10,000.

If the accountant has only added missing purchases worth $10,000 to the
cost of goods sold.

If the accountant has only increased accounts payable by $10,000.

If the accountant has reduced inventory by $10,000.

When a purchase is not recorded in financial statements and in ending
inventory, both purchases and ending inventory are understated, which
results in the correct cost of goods sold. Therefore, net income will not
be affected.
Question 2:
1A1-W006
The financial accountant of Eva Wolfe Corp. has ascertained the cash
flows from operations as follows.
Net income $15,000
Depreciation on equipment 2,500
Dividend income 2,500
Interest income 5,000
Increase in current assets 8,000
Increase in current liabilities 6,500
Cash flow from operations $16,000

The management accountant of the company argues that the cash flow
from operations should be $8,500. Which of the following statements, if
true, will undermine the management accountant's calculation?

The company operates in a tax-free environment.

Dividend income and interest income, already included in net income, are
considered cash flow from operating activities.

Cash flow from operations is ascertained using the direct method.

Depreciation on equipment should not be added back to net income for

calculating cash flow from operations.
If the company operates in a tax-free environment, the tax shield on
depreciation will not be adjusted from net income, and hence
depreciation has no effect in the calculation of cash flow from
operations.
Question 3:
1A2-W008

Sandra Bellucci, a financial analyst, is analyzing inventory of companies

from four different industries: consumer goods, sports goods
manufacturers, electronics, and aircraft manufacturers. Assuming that
the inventory valuation methods reflect the actual flow of inventory and
the inventory includes finished goods only, which of the following
industries will most likely have zero last in, first out (LIFO) reserve?

Consumer goods.

Sports goods manufacturers.

Electronics.
 Aircraft manufacturers.
Since electronic items are kept in store, the inventory balance using
LIFO and first in, first out (FIFO) will be different. Hence, the LIFO
reserve balance will not be zero.
Question 4:
1A2-W018

Which of the following is true of disclosure requirements of accounts

receivable?

The material receivables must be kept separate by type on the balance sheet
and reported net of any valuation accounts.

The monthly change in credit sales and accounts receivables should be

reported as part of footnotes.

Accounts receivables should not be reported as a line item if it is factored.

Accounts receivables should be classified as liquid part—included in current

assets and as illiquid part—included in noncurrent assets.
There is no such requirement for accounts receivables.
Question 5:
1A1-CQ13

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 6:
1A2-W005

AWS Inc. is engaged in the construction of rail tracks. The CEO

suggests allocating insurance, property taxes, and supervisory factory
labor to construction. But the management accountant opines that a
proportional amount of such indirect costs should be allocated to the rail
tracks. Which of the following, if true, will support the management
accountant's argument?

The indirect costs were allocated to the extent of the difference between net
realizable value and carrying value.

The indirect costs were allocated to the extent of proportionate completion.

The costs incurred on the rail tracks were in excess of their market value.

The indirect costs were not capitalized to the rail tracks.

A proportional amount of the overhead costs should be allocated to a
self-constructed asset. Any costs incurred in excess of the asset's
market value should not be capitalized but would be recorded as a loss.
Question 7:
1A2-W021

Amanda Williams, a financial analyst, is converting a last in, first out

(LIFO) income statement to a first in, first out (FIFO) income statement
to value a stock. She finds it difficult to calculate make the adjustments
and develops a mathematical expression to calculate FIFO cost of
goods sold (COGS). Which is the most likely expression that she can
derive to calculate FIFO COGS for all companies?

FIFO COGS = LIFO COGS + Change in LIFO reserve − Tax expenses

FIFO COGS = LIFO COGS − Change in LIFO reserve

LIFO COGS = FIFO COGS − Change in LIFO reserve

FIFO COGS = LIFO COGS − Change in LIFO reserve + Tax expenses

In simple terms, LIFO reserve is the difference between FIFO inventory
and LIFO inventory. Hence the difference is LIFO COGS, and FIFO
COGS will be the change in LIFO reserve. FIFO COGS = LIFO COGS −
Change in LIFO reserve
Question 8:
1A1-W014

How does the balance sheet help users?

It depicts the true value of an entity.

It measures the nonfinancial performance of an entity.

 It shows the financial performance of an entity for a specific period.

It assesses an entity's liquidity, solvency, financial flexibility, and operating

capability.
The balance sheet depicts the financial position of an entity, not its
nonfinancial performance. The balance sheet assesses an entity's
liquidity, solvency, financial flexibility, and operating capability.
Question 9:
1A1-W017

"Employing different accounting methods will yield different net

incomes." How is this factor a limitation of financial statements?

Choice between cash-based accounting and accrual accounting for financial

reporting allows companies to smooth earnings for a longer period.

The flexibility of employing different methods for presentation of financial

statements can lead to inaccurate disclosure of information.

Change in net income due to change in accounting methods affects the

determination of future performance of a company.

Difference in results due to change in accounting methods makes it difficult

for users to compare the performance of different entities.
Although a change in methods results in different net income, each
method incorporates for true and fair disclosure of the financial position
of an entity.
Question 10:
1A1-W011

According to US GAAP, which of the following statements is true of

comprehensive income?

Firms should report comprehensive income as a separate line item after net
income in the income statement.

Any realized or unrealized gain on an asset should be included as part of

comprehensive income, whereas realized or unrealized losses should be
excluded from comprehensive income.

Firms have the option of presenting the calculation of comprehensive income

either as part of an income statement or as a separate statement of
comprehensive income.

Comprehensive income can be presented as a part of the statement of

shareholders' equity.
Comprehensive income can no longer be presented as a part of the
statement of shareholders' equity. Firms have the option of presenting
the calculation of comprehensive income either as part of an income
statement or as a separate statement of comprehensive income.
Question 11:
1A2-W024

Johnston Corp. has issued the following securities for $3,000,000.

Units Par value Market value
Common stock 100,000 $10 $15
Bonds 40,000 $50 $80
Stock warrants 10,000 $5 $6

Which of the following is the approximate value of stock warrants based

on the proportional method?

$178,217

$200,000

$37,815

$49,180
According to the proportional method, the total amount investors paid
for the package is allocated between the two securities based on their
relative market values. The proportionate value of stock warrants can be
calculated as follows:
Fair market value of common stock (100,000 × $15) $1,500,000
Fair market value of bonds (40,000 × $80) $3,200,000
Fair market value of stock warrant (10,000 × $6) $60,000
Total market value $4,760,000
$60,000
Allocated to stock warrants = × $3,000,000 = $37,815 (approx.)
$4,760,000
Question 12:
1A1-LS35

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 13:
1A2-W023

Under which of the following situations will a company appropriate, or

restrict, its retained earnings?

When the company has potentially dilutive shares outstanding.

When the company has disclosed contingent liabilities in footnotes.

When the dividends paid by the company are more than the industry
average.

When the fair value of one or more securities cannot be determined.

Reasons that a firm might appropriate, or restrict, retained earnings
include:

 Loss contingencies (such as pending lawsuits).

 Legal restrictions related to treasury stock.
 Contractual restrictions related to bond indentures.
 Plant expansion or debt retirement.

Question 14:
1A1-W022

The management accountant of Kathryn Software decided to alter the

financial statements due to an event. Which of the following is the most
likelyreason for her decision?

The event provides evidence about a loss of expected income due to

inefficient collection efforts.

The company has decided to shift the company's headquarters to a country

that follows IFRS in the next year.

The event provides additional evidence about conditions that existed as of

the balance sheet date and alters the estimates used.
 There is a sharp decline in the stock price.
A plan to shift the company's headquarters does not initiate any
changes in financial estimations.
Question 15:
1A1-LS30

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 16:
1A1-LS43

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 17:
1A1-W023

Rita Williams and Sasha Ortiz recently joined Flifund Financials, a fund
management company. They are assigned to value the stock of Probe
Systems. Rita's estimate of assets and liabilities is higher than Sasha's
estimate. Which of the following will most likely undermine Rita's
estimation?

The company has no operating lease.

The company has purchased a high amount inventory on credit.

The company has an off-balance sheet transaction.

The company has no debt.

An off-balance sheet transaction, like an operating lease, will strengthen
Rita's estimate.
Question 18:
1A1-W020

Juan Baker Inc. filed a suit against Foster Desserts in the second
quarter of the current year and claimed damages worth $15,000. There
was also a pending litigation against Juan Baker Inc. for $12,000 to its
suppliers for supplying lower-quality goods. The company was
expecting to win the suit against Foster Desserts. For presenting the
financial statements for the year, Juan Baker's accountant realized a net
gain of $3,000 as other comprehensive income. As per U.S. GAAP, how
should this information be presented?

The accountant should recognize contingent liability of $12,000 and disclose

contingent gains of $15,000 as footnotes.

This information should not be presented as part of financial statements but

should be disclosed in footnotes to financial statements.

The accountant should realize net gain of $3,000 as part of gains from
extraordinary items.

This information should not be presented in financial statements but should

be disclosed in the directors' responsibility statement.
Accounting recognition is not given to gain contingencies to avoid the
premature recognition of income before its realization. However, loss
contingencies must be recognized when it is both probable that a loss
has been incurred and the amount of the loss is reasonably estimable.
Question 19:
1A2-W014

Elsa Fashions wants to eliminate its credit department. It also wants to

get cash immediately and continue all operational activities directly with
the customers. Which of the following approaches would be the best to
fulfill the company's objectives?

Factoring.

Securitization.

Sale with recourse.

Special investment vehicle.

A special investment vehicle is a pool of investment assets like asset-
backed securities. It is not suitable to use special investment vehicles to
liquidate accounts receivable
Question 20:
1A2-W011

The following information is extracted from the records of Silvia Garner

Laboratories about marketable securities.
Date of purchase Jan-1
Acquisition cost $25,000
Option premium $4,000
Holding cost $8,000
Brokerage fees $2,000
Market value on Dec-31 $30,000

Calculate the amount of gain or loss on revaluation to be reported on

the income statement as on December 31.

Loss of $9,000.

Loss of $1,000.

Gain of $3,000.

Gain of $5,000.
The option premium and holding cost should not be included in
incidental cost. Revaluation gain = $30,000 − ($25,000 + $2,000) =
$3,000.
Question 21:
1A2-W016

How is factoring of receivables different from securitization of

receivables?
 While factoring is appropriate for long-term term accounts receivable,
benefits of securitization can be received only on short-term accounts
receivables.

In factoring, factors buy receivables and take on the billing and collection
functions, whereas securitization is the process of converting illiquid assets
into liquid assets by bundling similar receivables into an investment fund.

Companies that use factoring receive cash after the recovery of principal and
interest, whereas in securitization, cash is received immediately.

In factoring, sellers of the receivables continue to service the receivables,

whereas under securitization, the company ceases to continue any
operational activities with the customers.
In factoring, a company continues all operational activities directly with
the customers, whereas, under securitization, the sellers of the
receivables continue to service the receivables.
Question 22:
1A2-W017

The management accountant of Tillboard Inc. has recognized a sale of

receivables or factoring in the books for the current year. In doing so, he
considered these three factors:
1) Ability of the buyer to sell the asset.
2) Surrender of control.
3) Asset outside the reach of the seller.

Under which of the following situations can the decision of the

management accountant go wrong?

The seller should be able to use the asset as collateral.

The asset is outside the reach of the creditors of the company.

The company has an agreement to repurchase the asset before its maturity.

The seller is liable for any loss realized or gain earned on the asset.
The seller should surrender the control over assets. Therefore, the
seller has no right to use the asset as collateral.
Question 23:
1A1-LS41

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 24:
1A2-W003

The latest financial statements of Darlene Properties show 140,000

outstanding shares, par value $10. The current market value per share
is $25. At the beginning of current year, the company reacquired 10,000
shares at $4 per share. The company follows the cost method for the
accounting of treasury stock. The current year's books of accounts show
the value of outstanding shares as follows:
Common stock, $10 par $1,400,000
Less: Treasury stock 100,000
Net common stock, $10 par $1,300,000

The company's CFO did not approve the financial statements. The most
likely reason for CFO's disapproval is that:

The treasury stock is incorrectly valued based on par value instead of being
valued at the acquisition price.

The treasury stock is incorrectly valued based on par value instead of being
valued at the current market rate.

The par value of the treasury stock should be presented as a deduction from
par value of issued shares of the same class.

The treasury stock should be reported as an asset.

In the cost method, the treasury stock account is debited for the cost of
the shares reacquired. Therefore, the value of treasury stocks should be
$40,000 (10,000 shares × $4), valued at the acquisition price.
Question 25:
1A2-W006

Calvin Software has invested in the equity stock of BioTech Corp. Its
holdings consisted of 35% of the voting stock. The CFO suggests
acquiring more stock of BioTech Corp. Based on the information, which
of the following will be true?

Additional acquisitions beyond 15% will require Calvin Software to issue

consolidated financial statements.

Calvin's total value will decrease as incidental costs of acquisition must be

subtracted when holdings exceed 35%.

The circumstances leading to the decision to acquire additional shares shall

be disclosed in the notes to the financial statements.

Any additional acquisition of assets up to 20% should be classified as held to

maturity.
There is no such requirement for equity securities.
Question 26:
1A1-CQ11

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 27:
1A2-W001

An extract of the footnotes of McGee Systems Inc., with 10 subsidiaries

across 5 countries, reads as follows:
"The company uses the temporal method for translation of subsidiary
accounts. All nonmonetary balances and the expenses associated with
them have been translated using historical exchange rates. Monetary
assets and liabilities and other assets and liabilities measured at current
values have been translated at the current exchange rate on the
balance sheet date. Income statement accounts, other than
nonmonetary accounts, have been translated using the historical
exchange rate."
The company's CFO did not approve the financial statements, stating
that the accounting policies followed are not in line with U.S. GAAP.
Which of the following statements support the CFO's decision?

Income statement accounts should be translated based on the current

exchange rate on the balance sheet date.

Income statement accounts, other than nonmonetary accounts, should be

translated based on the average rate for the current year.

All assets and liabilities should be translated using the average rate for the
current year.

All assets and liabilities should be translated based on the spot rate for the
current year.
Under the temporal method, nonmonetary balances (all balance sheet
items other than cash, claims to cash, and cash obligations) are
translated using historical exchange rates, and the expenses associated
with them should be translated at the historical exchange rate in effect
when the item was originally recorded. Monetary assets and liabilities
(cash, receivables, and payables) and other assets and liabilities
measured at current values (market values or discounted cash flows)
are translated at the current exchange rate on the balance sheet date.
Income statement accounts other than nonmonetary accounts are
translated using the average exchange rate for the current year (quarter
or month) for simplicity.
Question 28:
1A1-CQ06

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 29:
1A2-W002

Claire Enterprises has $150,000 in accounts receivable at the end of

Year 1, and it estimates its bad debts to be 5% of the receivables.
Hence, the accountant reports $7,500 as bad debts and the net
realizable value as $142,500. Under which of the following
circumstances will the amount of bad debts reported most
likely reduce?

If the company shortens the credit period allowed.

If the company lengthens the credit period allowed.

If the allowance for doubtful accounts has a credit balance of $1,500.

If the allowance for doubtful accounts has a debit balance of $1,500.

If there is an existing debit balance in the allowance for doubtful
accounts, then the bad debt expense should be adjusted upward,
because it is necessary to adjust the balance to the desired level.
Therefore, the correct balance will be $7,500 + $1,500 = $9,000.
Question 30:
1A1-LS32

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 31:
1A2-W025

An extract of the footnotes of Chavez Inc., with 13 subsidiaries across 4

countries, reads as follows:
"The company uses the current rate method for translation of subsidiary
accounts. Paid-in capital accounts have been translated using the
historic rate. All assets and liabilities have been translated using the
current exchange rate on the balance sheet date, whereas income
statement accounts have been translated using the end-of-year rate."
The CEO of the company did not approve the financial statements,
stating that the accounting policies followed are not in line with U.S.
GAAP. Which of the following statements support the CEO's decision?

Income statement accounts should be translated based on the current

exchange rate on the balance sheet date.

Income statement accounts should be translated based on the average rate

for the current year.

All assets and liabilities should be translated using the average rate for the
current year.

Paid-in capital accounts should be translated using the end-of-year rate.

In the current rate method, all assets and liabilities are translated using
the current exchange rate on the balance sheet date. Paid-in capital
accounts are translated using the historic rate. For simplicity, ASC
830 Foreign Currency Matters(formerly SFAS No. 52 Foreign Currency
Translation) requires translation of income statement accounts based
on the average rate for the current year.
Question 32:
1A1-LS31

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 33:
1A1-CQ07

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 34:
1A2-W010

Under which of the following circumstances will cash, set aside to fulfill
terms of an agreement, be determined as a long-term asset?

When it is not material and is subject to a significant risk of changes in value

due to change in the value of the associated long-term asset.

When it is used to pay liabilities beyond the operating cycle or year,

whichever is longer, or for the retirement of a specific long-term debt.

When the minimum balance requirements designed to offset part of the risk
of lending is more than the estimated value of liability.

When there is a debt instrument that is expected to mature after the

 operating cycle.
Restricted cash is a current asset if it will be used to pay liabilities within
a year or the operating cycle, whichever is longer. Otherwise, it is
reported as a long-term asset.
Question 35:
1A2-W009

Shelton Devin Corp. has two subsidiaries, of which 30% of ownership in

each subsidiary lies with Shelton Devin. The CEO of the company is not
in favor of presenting consolidated financial statements. Based on the
information, which of the following is most likely true?

The decision of the CEO is correct as companies are required to issue

consolidated statements only when the ownership exceeds 50%.

The decision of the CEO is wrong as companies are required to issue

consolidated statements when the ownership exceeds 20%.

The decision of the CEO is wrong as companies are required to issue

consolidated statements only if they hold more than ten subsidiaries.

The decision of the CEO is correct as companies are required to issue

consolidated statements when they have three or more subsidiaries.
As required by ASC 810 Consolidation (formerly SFAS No. 94,
Consolidation of All Majority-Owned Subsidiaries), all companies with
subsidiaries are required to issue consolidated statements including
each subsidiary they control, usually meaning 50% or more ownership.
Question 36:
1A1-LS28

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 37:
1A1-LS44

Stanford 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 38:
1A1-W025

While approving the financial statements for the current year, the
management accountant of Rachael Groups discovered that sales were
overstated. Which of the following is the most likely reason for the
overstatement?

Sales returns recorded are more than actual returns.

Abnormal losses are not accounted for.

General sales tax collected from customers was not accounted for.

The last in, first out method is used for valuation of inventory.
Usually sales tax is included in the selling price of a product. The sales
account should be adjusted for the amount of sales tax collected, and it
should be recorded as a liability.
Question 39:
1A2-W022

Brendan Bishop Scientific is considering acquisition of a plant in

exchange of the par value of its stock. However, the CFO is not in favor
of the acquisition. Which of the following is the most likely reason for
the CFO's disagreement?
 The company has fewer amounts of long-term assets.

The company's stock is most likely overpriced.

It is difficult to estimate the net realizable value of the asset and, hence,
difficult to estimate the annual depreciation expenses.

The true cost of the asset cannot be determined as the stock's trading
activity should also be considered.
The amount of long-term assets has no impact on the decision.
Question 40:
1A2-W013

Curtis Automobiles requires funds to finance its new project. If the

market rate of debt is higher than the stated rate, which of the following
options should the company choose?

Issue notes at par value.

Issue notes at the average market value.

Issue notes at a premium.

Issue notes at a discount.

A note should be issued at a discount when the market rate is higher
than the stated rate and at a premium when the market rate is lower
than the stated rate.
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