CMA 4 ALL SE

Question 1 1.A.1.b tb.fin.inc.010_1805 LOS: 1.A.1.b Lesson Reference: Overview of Financial Statements and the Income Statement Difficulty: hard Bloom Code: 4 The most likely use of an income statement prepared by ...

Question 1 1.A.1.b tb.fin.inc.010_1805 LOS: 1.A.1.b Lesson Reference: Overview of Financial Statements and the Income Statement Difficulty: hard Bloom Code: 4 The most likely use of an income statement prepared by a business enterprise is its use by which of the following? Labor unions to examine earnings closely as a basis for salary discussions. Government agencies to formulate tax and economic policy. Customers to determine a company's ability to provide needed goods and services. Rationale  Investors interested in the financial performance of the entity. The FASB's conceptual framework identifies potential investors and creditors as the primary focus of financial statements. An income statement provides information about a business's profitability. Whether a business is profitable is likely to influence an investor's decision to invest in that business as it is one aspect of its financial performance. Therefore, this is the correct answer. Rationale  Labor unions to examine earnings closely as a basis for salary discussions. While labor unions may examine earnings as a basis for salary discussions, it is just one factor in those discussions. In addition, the FASB conceptual framework identifies potential investors and creditors, not labor unions, as the primary focus of financial statements. Therefore, this is an incorrect answer. Rationale  Government agencies to formulate tax and economic policy. An income statement provides information about one business and is not likely to be very useful to formulate tax and economic policy. It is based on accrual accounting, which is different from tax accounting. Therefore, this is an incorrect answer. Rationale  Customers to determine a company's ability to provide needed goods and services. A customer may use an income statement to assess a company's financial performance as a company in poor financial condition may not be reliable supplier. However, it is not likely to be the major factor in the decision. Therefore, this is an incorrect answer. Investors interested in the financial performance of the entity. CorrectQuestion 2 1.A.1.a tb.fin.inc.001_1805 LOS: 1.A.1.a Lesson Reference: Overview of Financial Statements and the Income Statement Difficulty: medium Bloom Code: 4 Which aspect of a firm's statement of cash flows most interests potential stockholders? Changes in the firm's inventory balance The firm's gains and losses from selling plant assets Rationale  The firm's investments in new plant assets Potential shareholders are generally most interested in a firm's ability to increase its stock price and pay dividends. While investment in new plant assets may give some information about a firm's growth potential, it does not provide the most useful information to potential shareholders because it does not involve dividends. Therefore, this is an incorrect answer. Rationale  Changes in the firm's inventory balance A change in a firm's inventory balance is important information. However, potential shareholders are more interested in cash flow generated. Additionally, the change in inventory is better seen by looking at the balance sheet. Therefore, this is an incorrect answer. Rationale  The firm's gains and losses from selling plant assets Gains and losses from selling plant assets is important information. However, potential shareholders are more interested in cash flow generated. Therefore, this is an incorrect answer. Rationale  The firm's ability to pay dividends Potential shareholders are generally interested in a firm's ability to increase its stock price and pay dividends. The statement of cash flows provides information about cash generated (that can be used for future dividends) and cash used to pay dividends in the past. Therefore, this is the correct answer. The firm's ability to pay dividends Correct The firm's investments in new plant assets Your AnswerQuestion 3 1.A.1.e tb.fin.inc.018_1805 LOS: 1.A.1.e Lesson Reference: Overview of Financial Statements and the Income Statement Difficulty: medium Bloom Code: 4 When using the indirect method, which statement provides the most accurate description of the relationship between accounts receivable and the operating activities section on the statement of cash flows? A decrease in accounts receivable results in a decrease in the operating activities section on the statement of cash flows. A decrease in accounts receivable results in no change in the operating activities section on the statement of cash flows. Rationale  An increase in accounts receivable results in an increase in the operating activities section on the statement of cash flows. An increase in accounts receivable means that sales made on credit exceeded collections from customers. Since net income (the starting point of the operating activities section) uses cash sales and not cash collections, adding the increase in accounts receivable would result in “double counting” cash collections. Therefore, this is an incorrect answer. Rationale  An increase in accounts receivable results in a decrease in the operating activities section on the statement of cash flows. An increase in accounts receivable means that sales made on credit exceeded collections from customers. Since net income (the starting point of the operating activities section) uses cash sales and not cash collections, the increase in accounts receivable must be subtracted when calculating cash flow from operating activities. Therefore, this is the correct answer. Rationale  A decrease in accounts receivable results in a decrease in the operating activities section on the statement of cash flows. A decrease in accounts receivable means that collections from customers exceeded sales made on credit. Since net income (the starting point of the operating activities section) uses cash sales and not cash collections, the decrease in accounts receivable must be added when calculating cash flow from operating activities, not subtracted. Otherwise, cash flow from operating activities would be understated. Therefore, this is an incorrect answer. Rationale  A decrease in accounts receivable results in no change in the operating activities section on the statement of cash flows. A decrease in accounts receivable means that collections from customers exceeded sales made on credit. Since net income (the starting point of the operating activities section) uses cash sales and not cash collections, the decrease in accounts receivable must be added when calculating cash flow from operating activities. Otherwise, cash flow from operating activities would be understated. Therefore, this is an incorrect answer. An increase in accounts receivable results in a decrease in the operating activities section on the statement of cash flows. Correct An increase in accounts receivable results in an increase in the operating activities section on the statement of cash flows. Your Answer https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQQuestion 4 1.A.2.dd tb.fin.inc.042_1805 LOS: 1.A.2.dd Lesson Reference: Overview of Financial Statements and the Income Statement Difficulty: medium Bloom Code: 4 According to the FASB's conceptual framework, which of the following is/are included in comprehensive income? Neither gross margin nor operating income Gross margin Operating income Rationale  Neither gross margin nor operating income Comprehensive income includes all changes in equity during a period except changes from investments by owners and distributions to owners. Net income is the starting point for calculating it. Since operating income and gross margin are both components of net income, they are also components of comprehensive income. Therefore, this is an incorrect answer. Rationale  Gross margin and operating income Comprehensive income includes all changes in equity during a period except changes from investments by owners and distributions to owners. Net income is the starting point for calculating it. Since operating income and gross margin are both components of net income, they are also components of comprehensive income. Therefore, this is the correct answer. Rationale  Gross margin Comprehensive income includes all changes in equity during a period except changes from investments by owners and distributions to owners. Net income is the starting point for calculating it. Since gross margin is a component of net income, it is also a component of comprehensive income. However, operating income is also a component. Therefore, this is an incorrect answer. Rationale  Operating income Comprehensive income includes all changes in equity during a period except changes from investments by owners and distributions to owners. Net income is the starting point for calculating it. Since operating income is a component of net income, it is also a component of comprehensive income. However, gross margin is also a component. Therefore, this is an incorrect answer. Gross margin and operating income CorrectQuestion 5 1.A.2.dd fin.inc.tb.048_0120 LOS: 1.A.2.dd Lesson Reference: Overview of Financial Statements and the Income Statement Difficulty: medium Bloom Code: 3 A company is preparing its financial statements in accordance with U.S. GAAP. Listed below are select financial data for the company. Net income = $950,000 Depreciation = $40,000 Investment by owners = $60,000 Unrealized gain on available-for-sale securities = $90,000 Foreign currency translation loss = $20,000 What is the amount that would be reported as comprehensive income? *Source: Retired ICMA CMA Exam Questions. $970,000 $1,060,000 $1,120,000 Rationale  $970,000 This answer is incorrect. Depreciation is not added back to net income when calculating comprehensive income since comprehensive income is not based on cash flow. In addition, owner investment is not included in comprehensive income since comprehensive income does not focus on transactions with owners. Finally, unrealized gains on available-for-sale securities and foreign currency translation losses should be included when calculating comprehensive income. Rationale  $1,020,000 The calculation of comprehensive income starts with net income and includes unrealized gains and losses on available-for-sale securities, cash flow hedges gains and losses, foreign currency translation gains and losses, and gains and losses in pension and post-retirement benefit plans. In this example, comprehensive income includes the net income of $950,000, the unrealized gain on available-for-sale securities of $90,000, and the foreign currency translation loss of $20,000 ($950,000 + $90,000 − $20,000). This results in comprehensive income of $1,020,000. Rationale  $1,060,000 This answer is incorrect. Depreciation is not added back to net income when calculating comprehensive income since comprehensive income is not based on cash flow. Rationale  $1,120,000 This answer is incorrect. Depreciation is not added back to net income when calculating comprehensive income since comprehensive income is not based on cash flow. In addition, owner investment is not included in comprehensive income since comprehensive income does not focus on transactions with owners.