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Question 1:

2A4-LS12

All of the following are forms of off-balance sheet financing except:


Completing a horizontal merger.
Creating a special purpose entity.
Factoring accounts receivable.
Forming a joint venture.

The four common techniques used by companies to engage in off-balance sheet financing
are; factoring of receivables, creating a special purpose entity, operating leases and joint
ventures.
Question 2:
2A4-LS34

Which of the following costs, when subtracted from total revenue, yields economic profit?
*Source: Retired ICMA CMA Exam Questions.

Variable costs.
Recurring operating costs.
Fixed and variable costs.
Opportunity costs of all inputs.

Total revenue minus opportunity costs of all inputs = economic profit.


Question 3:
2A4-LS10

SFAS 52 permits two different methods for converting the financial statements of foreign
subsidiaries into U.S. dollars. Transaction gains and losses as a result of foreign currency
translation are reported as:
Income from discontinued operations.
An extra-ordinary item.
Income from continuing operations.
An adjustment to retained earnings.

Foreign currency exchange-rate adjustments to a company's financial statements are


recorded as "exchange gains" in current period activity.
Question 4:
2A4-CQ04

Paulson Incorporated acquired all of the common stock of Sampson Company on January 1,
20x1 for $80,000 LCU, which was equal to the fair value of the company. Paulson continued
to operate Sampson as a subsidiary in the foreign country. On January 1, 20x1 Sampson

borrowed $200,000 LCU and signed a 5-year note agreeing to pay 10% annual interest
beginning on January 1, 20x2. Sampson purchased a building for $280,000 LCU and
estimated its useful life as 20 years with no salvage value. The building will be depreciated
using the straight-line method. The subsidiary rents the building for $10,000 LCU per month
and as of December 31, 20x1, they received 11 payments for the year. During the year,
$8,000 in maintenance expenses were paid evenly throughout the year to maintain the
building. Sampson issued at $7,500 cash dividend to Paulson at the end of the year. The
functional currency for the subsidiary is the LCU. Exchange rates for 1 LCU were as follows:
January 1, 20x1
December 31, 20x1
Average for 20x1

$1.90
$2.00
$1.95

The accountant in the local country prepared the following income statement, balance sheet,
and statement of retained earnings for the year in LCU and forwarded it to Paulson
Incorporated.

What is amount of income reported on the income statement when Paulson translates these
accounts into U.S. dollars?
$156,000.
$152,100.
$165,000.
$148,200.

Please note the following income statement.

Question 5:
2A4-LS25

Which statements describe indicators of earnings quality?


I. Consistency in reporting policies is an indication of earnings quality.
II. A company with stable earnings levels is an indication of earnings quality.
III. More conservative accounting policies are an indicator of earnings quality.
IV. A company with widely varying earnings levels from year to year is an indication of
earnings quality.
I and II, only.
I, III, and IV, only.
I, II and III, only.
II, III and IV, only.

Consistent and conservative accounting reporting policies and stable earnings are indicators
of earnings quality. Companies with widely varying year to year earnings levels may indicate
a low level of earnings quality.
Question 6:
2A4-LS07

The currency of the primary environment in which the entity operates is commonly called the:

Historical currency.
Reporting currency.
Floating currency.
Functional currency.

For foreign subsidiaries the firms are required to identify a functional currency as the
currency of the primary environment in which the entity operates.
Question 7:
2A4-LS19

Consider the statements below regarding accounting treatments for goodwill under IFRSs.
Which statement describes the correct accounting treatment for goodwill under IFRSs?
IFRSs tests goodwill for impairment but goodwill is not amortized.
IFRSs allows goodwill to be amortized for a period not to exceed 20 years.
IFRSs allows goodwill to be amortized for a period not to exceed 40 years.
IFRSs does not allow the amortization of goodwill.

Like U.S. GAAP goodwill is never amortized but it should be tested annually for impairment.
Question 8:
2A4-CQ16

Carlson Company has the following payments recorded for the current period.

The total amount of the above items to be shown in the Operating Activities Section of
Carlson's Cash Flow Statement should be:
*Source: Retired ICMA CMA Exam Questions.

$150,000.
$250,000.
$750,000.
$350,000.

Interest paid on bank loans are considered an operating activity. Operating cash flows
include interest and dividends received and interest and income taxes paid as well as normal

operating inflows and outflows. Dividends paid are a financial activities. Purchase of
equipment is an investing activity.
Question 9:
2A4-CQ09

At the end of a fiscal year a parent company translates the financial statements for their
foreign subsidiary. A net asset balance sheet position exists and the foreign currency has
depreciated over the past year. Which of the following statements is true?
There is no transaction gain or loss.
There is no translation adjustment.
There is a negative translation adjustment.
There is a positive translation adjustment.

When a parent company translates the financial statements for a foreign subsidiary and the
foreign currency has depreciated over the past year, a negative translation adjustment will
occur when there is a net asset position on the balance sheet.
Question 10:
2A4-AT01

The Smalltown Technology Corporation has prepared the following information.

Calculate the cash flow from operating activities in Current year.

$1,250.
$1,880.
$1,190.
$1,550.

Cash flow from operations can be determined by the indirect method (the reconciliation of net
income to cash flow from operations). Cash flow from operations using the indirect method is
calculated as:
Cash flow from operations (indirect method) =
net income
+ non-cash debits in income statement
non-cash credits in income statement
+ increases in current liabilities (except dividends payable)
+ decreases in current assets (except cash and cash equivalents)
decreases in current liabilities (except dividends payable)
increases in current assets (except cash and cash equivalents)
Therefore, Smalltown's cash flow from operations can be calculated as:
Cash flow from operations (indirect method) =
$730 net income
+ $1,150 depreciation
+ $100 increase in accounts payable
$30 decrease in accrued liabilities
$200 increase in accounts receivable
$200 increase in inventory = $1,550.
Question 11:
2A4-CQ19

Selected financial information for Kristina Company for the year just ended is shown below.

Kristina's cash flow from investing activities for the year is:
*Source: Retired ICMA CMA Exam Questions.

$1,220,000.
$1,300,000.
$(1,500,000).
$2,800,000.

The cash flow from investing activities is calculated as cash received from the sale of
available-for-sale Securities minus cash paid for the acquisition of land or $2,800,000
1,500,000= $1,300,000.
Question 12:
2A4-CQ18

Selected financial information for Kristina Company for the year just ended is shown below.

Kristina's cash flow from financing activities for the year is:
*Source: Retired ICMA CMA Exam Questions.

$(80,000).
$3,520,000.
$800,000.
$720,000.

The answer is calculated as the cash receivable from the issue of common stock + cash paid
for dividends or $800,000 + 80,000 = $720,000. Financing activities include long-term debt
and equity cash transactions. The cash acquisition of land and the cash sale of available-forsale securities are investing transactions.
Question 13:
2A4-CQ17

Barber Company has recorded the following payments for the current period.

The amount to be shown in the Financing Activities Section of Barber's Cash Flow Statement
should be:
*Source: Retired ICMA CMA Exam Questions.

$600,000.
$500,000.
$300,000.
$900,000.

Both dividends paid to Barber shareholders and the repurchase of Barber Company stock
are financing activities. Financing activities include long-term debt and equity cash
transactions. Interest paid is included in operating cash flows.
Question 14:
2A4-LS01

Which of the following are elements of earnings quality?


I. Management's discretion in choosing from among accepted accounting principles
II. Management compensation in relation to net earnings

III. The degree to which assets are maintained


IV. The effect of cyclical and other economic forces on the stability of earnings
I and III only.
I, III, and IV only.
I, II, III, and IV.
II and IV only.

The basic factors of earnings quality are management and accountants' discretion in
choosing accounting principles, the degree to which maintenance of assets has been
provided for, and the effect of cyclical and other economic forces on the stability of earnings.
Question 15:
2A4-LS08

FAS 52 permits two different methods for converting the financial statements of foreign
subsidiaries into U.S. dollars. When the functional currency is U.S. dollars, the foreign
currency financial statements are re-measured into U.S. dollars using the:
Historical cost method.
Current rate method.
Functional currency method.
Temporal method.

When the functional currency is U.S. dollars, the foreign currency financial statements are remeasured into U.S. dollars using the temporal method.
Question 16:
2A4-LS14

An equity ownership of less than 50% in a business entity that is owned, operated, and
controlled by a small group of investors with a specific business purpose is commonly called
a:
Horizontal merger.
Conglomerate.
Joint venture.
Special purpose entity.

Joint ventures are often equity investments by a small group of investors in a business entity
where ownership by any one of them is less than 50%.
Question 17:
2A4-CQ02

On December 8, 20X1, Andrews Corporation purchased component parts from an unaffiliated


foreign entity in Europe for $20,000 Euro when the spot rate was 1.25. The spot rate was
1.15 on December 31, 20X1. Andrews paid the invoice on January 8, 20X2, when the spot

rate was 1.10. What amount should Andrews report as a foreign currency transaction gain in
its December 31, 20X1 income statement?
$0.
$2,000.
$1,000.
$3,000.

$20,000 (1.25 1.15) = $2,000 gain as of December 31, 20X1.


Question 18:
2A4-LS23

The correct definition of accounting profit is:


The excess net assets available to shareholders
The excess of equity over liabilities
The excess of revenues over the costs of land, labor, and capital.
The excess of revenues over expenses.

Accounting profits are earned when the income of an organization exceeds the expenses.
Question 19:
2A4-LS24

The correct definition of economic profit is:


The excess of equity over liabilities.
The excess of revenues over the costs of land, labor, and capital.
The excess net assets available to shareholders.
The excess of revenues over expenses.

Economic profit is the excess of revenues over the costs of land, labor, and capital.
Question 20:
2A4-CQ07

Paulson Incorporated acquired all of the common stock of Sampson Company on January 1,
20x1 for $80,000 LCU, which was equal to the fair value of the company. Paulson continued
to operate Sampson as a subsidiary in the foreign country. On January 1, 20x1 Sampson
borrowed $200,000 LCU and signed a 5-year note agreeing to pay 10% annual interest
beginning on January 1, 20x2. Sampson purchased a building for $280,000 LCU and
estimated its useful life as 20 years with no salvage value. The building will be depreciated
using the straight-line method. The subsidiary rents the building for $10,000 LCU per month
and as of December 31, 20x1, they received 11 payments for the year. During the year,
$8,000 in maintenance expenses were paid evenly throughout the year to maintain the

building. Sampson issued at $7,500 cash dividend to Paulson at the end of the year. The
functional currency for the subsidiary is the LCU. Exchange rates for 1 LCU were as follows:
January 1, 20x1
December 31, 20x1
Average for 20x1

$1.90
$2.00
$1.95

The accountant in the local country prepared the following income statement, balance sheet,
and statement of retained earnings for the year in LCU and forwarded it to Paulson
Incorporated.

What is the impact on return on assets when Paulson translates Sampson's accounts into
U.S. dollars?
Return on assets increases from 20.5% to 22.6%.
There is no effect; return on assets remains the same.
Return on assets increases from 20.5% to 21. 1%.

Return on assets decreases from 21.1% to 20.5%.

Return on Assets in LCU = 21.1% (78,000LCU/370,500LCU) and decreases to 20.5%


($152,100/$741,000) when the financial statements are translated. Net Income changes from
78,000LCU times 1.95 to U.S. $152,100 and assets change from 370,500LCU times 2.0 to
U.S. $741,000.
Question 21:
2A4-CQ22

Selected financial information for Kristina Company for the year just ended is shown below.

Assuming the indirect method is used, Kristina's cash flow from operating activities for the
year is:
*Source: Retired ICMA CMA Exam Questions.

$1,700,000.
$2,400,000.
$2,000,000.
$3,100,000.

Net income 2,000,000 + depreciation 400,000 increase in accounts receivable 300,000 +


decrease in inventory 100,000 + increase in accounts payable 200,000 gain on sale of
securities 700,00 = 1,700,000 cash flow from operating activities.
Question 22:
2A4-CQ01

At the end of its fiscal year on December 31, 2000, Merit Watches had total shareholders'
equity of $24,209,306. Of this total, $3,554,405 was preferred equity.

During the 2001 fiscal year, Merit's net income after tax was $2,861,003. During 2001, Merit
paid preferred share dividends of $223,551 and common share dividends of $412,917. At
December 31, 2001, Merit had 12,195,799 common shares outstanding and the company did
not sell any common shares during the year.
What was Merit Watch's book value per share on December 31, 2001?
$1.91.
$2.17.
$1.88.
$2.20.

Book value per share is calculated as:


Book value per share = (common stock equity) / (average number of common stock shares
outstanding)
The common stock equity at December 31, 2001 is equal to the total stock equity at
December 31, 2000 plus the net income for 2001, less the 2001 dividends, less the preferred
equity.
Common stock equity at 12/31/01 = (total stock equity at 12/31/00) + (2001 net income)
(2001 dividends) (preferred equity)
Common stock equity at 12/31/01 = $24,209,306 + $2,861,000 $223,552 $412,917
$3,554,405
Common stock equity = $22,879,436
Book value per share = $22,879,436 / 12,195,799 shares = $1.88 per share.
Question 23:
2A4-LS13

A business entity that is owned, operated, and controlled by a small group of investors with a
specific business purpose, common goal, and is created specifically to keep the liabilities
associated with a specific project off the parent company's books is commonly called a:
Joint venture.
Special purpose entity.
Horizontal merger.
Conglomerate.

An Special purpose entity is an entity created with a special sometimes undisclosed business
purpose where the entity is often times created specifically to keep the liabilities associated
with a specific project off the parent company's books.

Question 24:
2A4-LS11

When a company attempts to make use of an asset without showing the corresponding
obligation, this is commonly called:
Off-balance sheet financing.
Hedging.
Factoring.
Cost assignment.

When a company attempts to use an asset or borrow cash without showing the
corresponding liability, it is commonly termed, off-balance sheet financing.
Question 25:
2A4-LS16

The IASB has been working closely with the FASB to harmonize the international standards
with U.S. GAAP. Differences in accounting treatment exist for all of the following except:
Accounting for impairment of assets.
Accounting for inventory using last-in-first out (LIFO).
Accounting for inventory using first-in-first out (FIFO).
Accounting for development costs.

Both IAS and U.S. GAAP allow accounting for inventory using FIFO; therefore there is no
difference using this method.
Question 26:
2A4-LS17

Consider the statements below regarding accounting treatments under U.S. GAAP and
IFRSs. Which statements are correct?
I. U.S. GAAP permits the recording of extraordinary items on the income statement.
II. IFRS does not permit the use of LIFO to account for inventory.
III. Under IFRS, fair value accounting for property, plant and equipment is only allowed when
fair value is reliably measurable.
IV. Under U.S. GAAP research and development costs are capitalized as incurred.
I, II, and III, only.
I and III, only.
II, III and IV, only.
II and IV, only.

Answers I, II, and III are all true statements. Answer IV is not a correct statement. Under U.S.
GAAP research and development costs are expensed as incurred, not capitalized.

Question 27:
2A4-CQ13

Larry Mitchell, Bailey Company's controller, is gathering data for the Statement of Cash Flows
for the most recent year end. Mitchell is planning to use the direct method to prepare this
statement, and has made the following list of cash inflows for the period.
Collections of $100,000 for goods sold to customers.
Securities purchased for investment purposes with an original cost of $100,000 sold for
$125,000.
Proceeds from the issuance of additional company stock totaling $10,000.
The correct amount to be shown as cash inflows from operating activities is:
*Source: Retired ICMA CMA Exam Questions.

$225,000.
$135,000.
$100,000.
$235,000.

When using the direct method, collections of $100,000 for goods sold to customers would be
classified as an operating activity. The cash sale of securities is an investing activity. The
issuance of stock for cash is a financing activity.
Question 28:
2A4-CQ21

Three years ago, James Company purchased stock in Zebra Inc. at a cost of $100,000. This
stock was sold for $150,000 during the current fiscal year. The result of this transaction
should be shown in the Investing Activities Section of James' Statement of Cash Flows as:
*Source: Retired ICMA CMA Exam Questions.

$50,000.
$100,000.
$150,000.
Zero.

The amount shown is the investing section would be the amount the stock was sold for
during the current fiscal year.
Question 29:
2A4-LS09

SFAS 52 permits two different methods for converting the financial statements of foreign
subsidiaries into U.S. dollars. When the functional currency is the local currency of the
foreign entity, the foreign financials are translated into U.S. dollars using the:

Temporal method.
Current rate method.
Historical cost method.
Functional currency method.

When the functional currency is the local currency of the foreign entity, the foreign financials
are translated into U.S. dollars using the current rate method.
Question 30:
2A4-LS32

The concept of economic profit is best defined as total:


*Source: Retired ICMA CMA Exam Questions.

revenue minus all accounting costs.


revenue minus all explicit and implicit costs.
income minus the sum of total fixed and variable costs.
revenue minus the sum of total fixed and variable costs.

Economic profit is best defined as total revenue minus all explicit and implicit costs.
Question 1:
2A4-LS22

Consider the statements below comparing financial ratios based on historical cost to those
based on fair value. Which statements are correct?
I. Fair Value disclosures can supplement historical cost ratio analysis.
II. If market prices decline, then ratios using fair value prices will show better results than
those using historical cost.
III. If market prices decline, then ratios using fair value prices will show worse results than
those using historical cost.
IV. If market prices increase, ratios using fair value prices will show higher ratios than those
using historical cost.
I, III, and IV, only.
I and III, only.
II, III and IV, only.
I, II and IV, only.

Fair Value disclosures can supplement historical cost ratio analysis. If market prices decline,
then ratios using fair value prices will show worse results than those using historical cost. If
market prices increase, ratios using fair value prices will show higher ratios than those using
historical cost.

Question 2:
2A4-LS28

The functional currency of an entity is defined as the currency:


*Source: Retired ICMA CMA Exam Questions.

of the entity's parent company.


of the primary economic environment in which the entity operates.
in which the books of record are maintained for all entity operations.
of the primary country in which the entity is physically located.

The functional currency is the currency of the primary environment in which the entity
operates.
Question 3:
2A4-AT04

The Meade Corporation reports the following financial results.

Which of the following is correct?


Over the four year period, reported sales increased by 12%, but 10% was caused by inflation.
Over the four year period, sales increased faster than cost of goods sold.
Inflation increased reported sales more than it increased reported cost of goods sold.
The rate of inflation exceeded the increase in reported sales between Year 2 and Year 3.

From the given information, the inflation rate over the 4 years can easily be computed as
10%.
Change in inflation = (inflation, year 4 inflation, year 1) / inflation, year 1
Change in inflation = (1.10 1.00)/1.00 = 0.10/1.00 = 0.1 or 10%
The increase in the inflation rate alone would have caused the sales to increase only to
$1,375,000, which is calculated as $1,250,000 1.10.
From the given information, the increase in sales can be computed as 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%
Therefore, sales increased by 12% over the 4 year period, with 10% of the increase being
attributed to inflation.
Question 4:
2A4-AT02

The credit manager of Weatherton Men's Wear Manufacturing is comparing the financial
statements of two retailers who buy the men's wear on credit terms. A summary of the
accounting policies of the two retailers is shown below.

Which retailer is more conservative in its reporting of income?


Retailer A.
Each retailer is conservative in one policy, less conservative in the other.
Both are equally conservative.
Retailer B.

Conservatism involves showing the least possible net income for a given set of
circumstances. Assuming that prices are rising, last-in, first-out (LIFO) would report a higher
cost of goods sold than if first-in, first-out (FIFO) were used, and the use of LIFO would also
show a lower net income than if FIFO were used. Declining balance depreciation, assuming
the company is growing, increases depreciation expenses, resulting in a decrease in net
income. Since Retailer B uses both LIFO and declining balance depreciation, it is being more
conservative than Retailer A.
Question 5:
2A4-LS03

Which of the following statements is true?


Financial statements need not make adjustments for inflation, as earnings automatically reflect the
higher prices.
Financial statements generally make adjustments for inflation, so earnings may be clearly
represented over time.
Financial statements generally do not make adjustments for inflation, so earnings may be
significantly compounded over time.

Financial statements make adjustments for inflation every year and state the inflation rate for the
year in the footnotes of the annual report.

Financial statements generally do not make adjustments for inflation, so earnings may be
significantly compounded over time.
Question 6:
2A4-LS15

All of the following are popular reasons that companies may use off-balance sheet financing
except:
To improve certain financial ratios.
To increase assets and debt on the balance sheet.
To mitigate or transfer risk.
To make use of an asset without showing the corresponding liability on the balance sheet.

By definition, off-balance sheet financing activities are structured to minimize the recording of
assets and / or liabilities on a company's balance sheet which would make "to increase
assets and debt on the balance sheet" contrary to their use.
Question 7:
2A4-LS26

At the end of a fiscal year a parent company translates the financial statements for their
foreign subsidiary. A net liability balance sheet position exists and the foreign currency has
depreciated over the past year. Which of the following statements is true?
There is no translation adjustment.
There is no transaction gain or loss.
There is a negative translation adjustment.
There is a positive translation adjustment.

When a parent company translates the financial statements for a foreign subsidiary and the
foreign currency has depreciated over the past year, a positive translation adjustment will
occur when there is a net liability position on the balance sheet.
Question 8:
2A4-LS29

If a company uses off-balance-sheet financing, assets have been acquired:


*Source: Retired ICMA CMA Exam Questions.

with operating leases.


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

With operating leases. Companies make use of an asset without showing the corresponding
obligation. Four of the common techniques employed to achieve off-balance sheet financing
are: factoring of accounts receivables; special purpose entities; operating leases; and joint
ventures.
Question 9:
2A4-LS02

Which of the following statements is true?


Economic profits are accounting profits minus implicit costs.
Economic profits are accounting profits minus explicit costs.
Accounting profits are economic profits minus explicit costs.
Accounting profits are economic profits minus implicit costs.

Economic profits are the ability to make more than normal profits. Economic profits are
calculated by subtracting implicit costs, such as opportunity costs, from accounting profits.
Question 10:
2A4-AT03

Which one of the following best describes why the market value of a company may be
significantly higher than the book value?
The company may still be using machinery which has been fully depreciated.
The current growth in revenue may be difficult to maintain in coming years.
The company may have recorded goodwill for an acquisition that has been unexpectedly difficult to
merge with existing operations.
The company may have recorded in the current period revenues for sales which may be returned in
future periods.

The book value of a firm is primarily based upon amortized historical costs. Its equity book
value is the book value of its assets less the book value of its liabilities. The book value of the
assets, in this case, may be depressed due to the use of fully depreciated assets. The market
value of the company is the market value of its assets less its liabilities. In this case, the
market values of the fully depreciated assets will most likely exceed their fully depreciated
book values.
Question 11:
2A4-LS33

Economic costs often differ from costs shown in a firm's financial statements. For a
corporation, a major difference would arise due to:
*Source: Retired ICMA CMA Exam Questions.

salary and wage costs.


opportunity costs.

state and local tax costs.


interest costs.

The economic cost of a decision depends on both the cost of the alternative chosen and the
benefit that the best alternative would have provided if chosen. Economic cost differs from
accounting cost because it includes opportunity cost.
Question 12:
2A4-LS05

If the books of a foreign entity are maintained in a currency other than the functional
currency, foreign currency amounts must be re-measured into the functional currency. All of
the following items should be re-measured at the historical rate except:
Prepaid expenses.
Property, plant, and equipment.
Accounts receivable.
Cost of goods sold.

Nonmonetary balance sheet items and related revenues, expenses, gains, and losses are remeasured at the historical rate. Monetary items are re-measured at the current rate.
Question 13:
2A4-LS20

Consider the statements below regarding accounting treatments for goodwill under U.S.
GAAP. Which statement is the most correct description of the accounting treatment for
goodwill under U.S. GAAP?
U.S. GAAP allows goodwill to be amortized for a period not to exceed 40 years.
U.S. GAAP does not allow the amortization of goodwill.
U.S. GAAP tests goodwill for impairment but goodwill is not amortized.
U.S. GAAP allows goodwill to be amortized for a period not to exceed 20 years.

U.S. GAAP considers goodwill to have an indefinite life and as such does not permit periodic
amortization. Companies are required to adjust the carrying value of its goodwill whenever it
is determined that impairment has occurred.
Question 14:
2A4-LS30

A change in the estimate for bad debts should be:


*Source: Retired ICMA CMA Exam Questions.

treated as an error.
treated as affecting only the period of the change.
considered as an extraordinary item.

handled retroactively.

A change in the estimate for bad debts should be treated as affecting only the period of the
change. Changes in estimates are made prospectively, not retroactively.
Question 15:
2A4-AT05

Two companies, Alpha and Beta, have exactly the same facilities and financing. Both lease
their equipment at the same rate and for the same period of time. Because of differing
assumptions allowed under GAAP, however, Alpha capitalizes its lease, while Beta reports its
lease as an operating lease.
Which of the following statements is true?
Alpha and Beta have exactly the same debt-to-equity ratio.
The terms of the lease agreement must be known in order to determine either company's debt-toequity ratio.
Alpha has a higher debt-to-equity ratio.
Beta has a higher debt-to-equity ratio.

Since Alpha capitalized its lease, it will have a lease liability on its balance sheet, which
increases its debt and therefore, its debt-to-equity ratio. An operating lease has no effect on
the balance sheet.
Question 16:
2A4-CQ23

Williams makes $35,000 a year as an accounting clerk. He decides to quit his job to enter an
MBA program full-time. Assume Williams doesn't work in the summer or hold any part-time
jobs. His tuition, books, living expenses, and fees total $25,000 a year. Given this
information, the annual total economic cost of Williams' MBA studies is:
*Source: Retired ICMA CMA Exam Questions.

$60,000.
$10,000.
$25,000.
$35,000.

The economic cost of a decision depends on both the cost of the alternative chosen and the
benefit that the best alternative would have provided if chosen. Economic cost differs from
accounting cost because it includes opportunity cost. The total economic cost in this scenario
is the $35,000 salary + $25,000 tuition, books, living expenses, and fees = $60,000.
Question 17:
2A4-CQ03

On December 8, 20X1, ATI Corporation, based in the United States, sold inventory to BMZ,
an unaffiliated foreign entity, in Europe for 10,000 Euros when the spot rate was 1.25
Dollars / Euro. The spot rate was 1.15 Dollars / Euro on December 31, 20X1. BMZ paid the
invoice on January 8, 20X2, when the spot rate was 1.10 Dollars / Euro. What amount should
ATI report as a foreign currency transaction gain or loss in its December 31, 20X1 income
statement?
$1,000 loss.
$1,500 loss.
$1,000 gain.
$1,500 gain.

$10,000 (1.15 1.25) = $1,000 loss as of December 31, 20X1.


Question 18:
2A4-LS31

Finer Foods Inc., a chain of supermarkets specializing in gourmet food, has been using the
average cost method to value its inventory. During the current year, the company changed to
the first-in, first-out method of inventory valuation. The president of the company reasoned
that this change was appropriate since it would more closely match the flow of physical
goods. This change should be reported on the financial statements as a:
*Source: Retired ICMA CMA Exam Questions.

cumulative-effect type accounting change.


change in an accounting estimate.
correction of an error.
retroactive-effect type accounting change

A change in inventory method is reported as a cumulative-effect type accounting change per


SFAS 154. All prior period statements presented must be restated to reflect the change in
accounting principle.
Question 19:
2A4-LS27

A firm's functional currency should be:


*Source: Retired ICMA CMA Exam Questions.
the currency of the foreign environment in which the firm primarily generates and expends cash.
selected on the basis of several economic factors including cash flow, sales price, and financing
indicators.
the currency of the parent organization as the firm operates as an extension of the parent's
operations.

selected on the basis of cost-benefit analysis and ease of preparing consolidated financial
statements.

A firm's functional currency is the currency used in conducting the subsidiary's operations.
Question 20:
2A4-CQ20

For the fiscal year just ended, Doran Electronics had the following results.

Doran's net cash flow from operating activities is:


*Source: Retired ICMA CMA Exam Questions.

$1,018,000.
$928,000.
$986,000.
$1,074,000.

The net cash flow from operating activities is calculated as Net income + Depreciation
expense + Increase in accounts payable Increase in accounts receivable + Increase in
deferred income tax liability or ($920,000 + 110,000 + 45,000 73,000 + 16,000) =
$1,018,000.
Question 21:
2A4-CQ15

Atwater Company has recorded the following payments for the current period.

The amount to be shown in the Investing Activities Section of Atwater's Cash Flow Statement
should be:

*Source: Retired ICMA CMA Exam Questions.

$500,000.
$900,000.
$300,000.
$700,000.

Purchasing another company's stock would be classified as an investing activity. The other
two transactions are financing transactions.
Question 22:
2A4-CQ14

During the year, Deltech Inc. acquired a long-term productive asset for $5,000 and also
borrowed $10,000 from a local bank. These transactions should be reported on Deltech's
Statement of Cash Flows as:
*Source: Retired ICMA CMA Exam Questions.

Outflows for Financing Activities, $5,000; Inflows from Investing Activities, $10,000.
Inflows from Investing Activities, $10,000; Outflows for Financing Activities, $5,000.
Outflows for Operating Activities, $5,000; Inflows from Financing Activities, $10,000.
Outflows for Investing Activities, $5,000; Inflows from Financial Activities, $10,000.

Purchasing a long-term assets would be classified as an outflows for Investing Activities.


Borrowing money would be classified as a inflow from Financial Activities.
Question 23:
2A4-CQ05

Paulson Incorporated acquired all of the common stock of Sampson Company on January 1,
20x1 for $80,000 LCU, which was equal to the fair value of the company. Paulson continued
to operate Sampson as a subsidiary in the foreign country. On January 1, 20x1 Sampson
borrowed $200,000 LCU and signed a 5 year note agreeing to pay 10% annual interest
beginning on January 1, 20x2. Sampson purchased a building for $280,000 LCU and
estimated its useful life as 20 years with no salvage value. The building will be depreciated
using the straight-line method. The subsidiary rents the building for $10,000 LCU per month
and as of December 31, 20x1, they received 11 payments for the year. During the year,
$8,000 in maintenance expenses were paid evenly throughout the year to maintain the
building. Sampson issued at $7,500 cash dividend to Paulson at the end of the year. The
functional currency for the subsidiary is the LCU. Exchange rates for 1 LCU were as follows:
January 1, 20x1
December 31, 20x1
Average for 20x1

$1.90
$2.00
$1.95

The accountant in the local country prepared the following income statement, balance sheet,
and statement of retained earnings for the year in LCU and forwarded it to Paulson
Incorporated.

What is amount of translation adjustment reported on the balance sheet when Paulson
translates Sampson's accounts into U.S. dollars?
$3,900.
$8,000.
$11,900.
$15,600.

Please note the following:

Question 24:
2A4-LS04

A European company provides annual reports for U.S. investors purchasing ADRs of the
company's stock in the United States. The company reports 1,500,000 net income. The
exchange rate between the euro and the U.S. dollar is 1.19/$1. Which of the following
statements is true?
Annual statements sent to U.S. investors will show net income as $1,260,504.
Annual statements sent to U.S. investors will show net income as $1,500,000.
Annual statements sent to U.S. investors will show net income as 1,500,000.
Annual statements sent to U.S. investors will show net income as $1,785,000.

Financial statements generally do not make adjustments for foreign currency exchange rates,
as this would show wild fluctuations due to the exchange rate rather than company
performance.
Question 25:
2A4-LS06

If the books of a foreign entity are maintained in a currency other than the functional
currency, foreign currency amounts must be re-measured into the functional currency. All of
the following items should be re-measured at the current rate except:
Prepaid expenses.
Accounts payable.
Inventory carried at market value.
Accounts receivable.

Nonmonetary balance sheet items and related revenues, expenses, gains, and losses are remeasured at the historical rate. Monetary items are re-measured at the current rate.
Question 26:
2A4-LS21

Consider the statements below regarding accounting treatments for business combinations.
Which statement is incorrect?
Under IFRS, a subsidiary must be consolidated when it is under control of the parent.
Under U.S. GAAP, a subsidiary must be consolidated when the parent owns a majority of voting
interest in the subsidiary.
Under IFRS, a subsidiary must be consolidated when the parent owns a majority of voting interest in
the subsidiary.
Under U.S. GAAP, a subsidiary must be consolidated when it is under control of the parent.

Accounting treatments for business combinations include the requirements of consolidation


of subsidiaries under the control of a parent (IFRS and U.S. GAAP),and majority ownership
by a parent (IFRS).
Question 27:
2A4-LS18

Consider the statements below regarding accounting classifications for leases under U.S.
GAAP and IFRSs. Which statements are correct?
I. IFRS does not allow classification of a lease as an operating lease regardless the
substance of the transaction.
II. IFRSs does not allow classification of a lease as a finance (capital) lease.
III. U.S. GAAP does not allow classification of a lease as a leveraged lease.
IV. U.S. GAAP allows classification of a lease by the lessor as either a; sales-type, direct
financing, or operating lease based on the substance of the transaction.
I and IV, only.
I, II, and III, only.
I and III, only.
II, III and IV, only.

IFRSs allows classification of a lease as an operating lease or finance (capital lease) based
on the substance of the transaction. IFRSs does not allow a lease to be classified as a
leveraged lease. U.S. GAAP allows classification of leases as either capital lease, sales-type,
financing, or leveraged lease.
Question 28:
2A4-CQ06

Paulson Incorporated acquired all of the common stock of Sampson Company on January 1,
20x1 for $80,000 LCU, which was equal to the fair value of the company. Paulson continued
to operate Sampson as a subsidiary in the foreign country. On January 1, 20x1 Sampson
borrowed $200,000 LCU and signed a 5-year note agreeing to pay 10% annual interest
beginning on January 1, 20x2. Sampson purchased a building for $280,000 LCU and

estimated its useful life as 20 years with no salvage value. The building will be depreciated
using the straight-line method. The subsidiary rents the building for $10,000 LCU per month
and as of December 31, 20x1, they received 11 payments for the year. During the year,
$8,000 in maintenance expenses were paid evenly throughout the year to maintain the
building. Sampson issued at $7,500 cash dividend to Paulson at the end of the year. The
functional currency for the subsidiary is the LCU. Exchange rates for 1 LCU were as follows:
January 1, 20x1
December 31, 20x1
Average for 20x1

$1.90
$2.00
$1.95

The accountant in the local country prepared the following income statement, balance sheet,
and statement of retained earnings for the year in LCU and forwarded it to Paulson
Incorporated.

Prepare the statement of cash flows for Sampson. What is the impact on reported cash flows

from the effect of exchange rates when Paulson translates Sampson's accounts into U.S.
dollars?
$11,900.
$3,900.
$5,100.
$8,000.

Please note the following:

Question 29:
2A4-CQ08

Paulson Incorporated acquired all of the common stock of Sampson Company on January 1,
20x1 for $80,000 LCU, which was equal to the fair value of the company. Paulson continued
to operate Sampson as a subsidiary in the foreign country. On January 1, 20x1 Sampson
borrowed $200,000 LCU and signed a 5-year note agreeing to pay 10% annual interest
beginning on January 1, 20x2. Sampson purchased a building for $280,000 LCU and

estimated its useful life as 20 years with no salvage value. The building will be depreciated
using the straight-line method. The subsidiary rents the building for $10,000 LCU per month
and as of December 31, 20x1, they received 11 payments for the year. During the year,
$8,000 in maintenance expenses were paid evenly throughout the year to maintain the
building. Sampson issued at $7,500 cash dividend to Paulson at the end of the year. The
functional currency for the subsidiary is the LCU.
Exchange rates for 1 LCU were as follows:
January 1, 20x1
December 31, 20x1
Average for 20x1

$1.90
$2.00
$1.95

The accountant in the local country prepared the following income statement, balance sheet,
and statement of retained earnings for the year in LCU and forwarded it to Paulson
Incorporated.

What is the impact on return on equity when Paulson translates Sampson's accounts into
U.S. dollars?
Return on equity increases from 50.5% to 52.6%.
Return on equity decreases from 51.8% to 50.5%.
There is no effect; return on equity remains the same.
Return on equity decreases from 52.6% to 50. 5%.

Return on Equity in LCU = 51.8% (78,000/150,500) and decreases to 50.5%


($152,100/$301,000) when the financial statements are translated. . Net Income changes
from 78,000LCU times 1.95 to U.S. $152,100 and equity changes from 150,500LCU times
2.0 to U.S. $301,000.