CMA comparison to CIMA

Points of Difference CMA CIMA

Certification in demand USA, India, China & Middle UK & Common Wealth
East Countries
Body IMA CIMA
Skills Financial Management Accounting & Costing
Eligibility Bachelor’s degree Anyone
Experience Not required 3 years in accounting
Papers 2 16
Exam Window 3 windows No such window
Duration 6 months to 1 year 3-4 years

PART 1

Financial Reporting, Planning, Performance and Control

Category Unit Topics Weight

1 External Financial Statements and Revenue
Recognition
External Financial 2 Measurement, Valuation and Disclosure 15
Reporting : Investments and Short-Term items
Decisions 3 Measurement, Valuation and Disclosure
: Investments and Short-Term items

4 Cost Management Concepts

5 Cost Accumulation Systems
Cost Management 6 Cost Allocation Techniques 20
7 Operational Efficiency and Business Process
Performance
 8 Analysis and Forecasting Techniques
Planning, 9 Budgeting Concepts, Methodologies and Preparation
Budgeting & 10 10.2-Flexible Budgeting 30
Forecasting

Performance 10 Cost and Variance Measures

Management 11 Responsibility Accounting & Performance Measures 20

12 Corporate Governance
Internal Controls 13 Controls and Security Measures 15

Abbreviations used in the book

IMA-Institute of Management Accountants, an Association of Accountants and Finance

Professional in Business

CSO-Content Specification Outline-mentions contents to be tested

LSO-Learning Outcome Statements-What candidates need to know and the skills they
should have

CMA Designations-Write CMA after your name

• Become a member with IMA, pay entrance fee

• Pass the 2 parts within 3 years-computer based tests
• Satisfy education & requirements within 2 years
 • Comply with Ethical Practice

You will be issued a numbered CMA certificate-maintain it by paying annual membership

fee, to maintain CPE as well.

CPE is of 30 hours annually

Examination-4 hours

100 MCQ

Within 3 hours

You must answer at least 50% of the multiple-choice questions correctly to be eligible to
take the essay section

Once you submit MCQs, no chance of going back

2-30 minutes essay questions

Will be presented only completing MCQ or 3 hours w.e is earlier

The essay section consists of 8-10 written response or calculation questions based on
two scenarios, describing a typical business situation.

Note: The scores for the multiple choice section will be added to the scores of the essay
section for a total weighted score of pass/fail reflected in a scaled score for the entire
part. Candidates are not required to “pass” both sections; the total score determines
pass/fail status.
Why Choose ELEGANT Training for your CMA exam preparation course?

• Training by Qualified Professionals and IMA members

• Course materials (Gleim) or Wiley hand-outs for important chapters
• 3 Mock tests, Case studies with simulations
• Training in small batch for personalized attention
• Full access to the trainers at any time
 STUDY UNIT 1

EXTERNAL FINANCIAL STATEMENTS AND REVENUE RECOGNITION

Weightage 5%

What we will cover in this unit:

CONCEPTS OF FINANCIAL ACCOUNTING

• Objectives of General Purpose Financial Reporting

• Users of Financial Statements
• Features of Financial Statements
• Financial Statement Relationships
• Accrual Basis of Accounting

STATEMENT OF FINANCIAL POSITION

• Elements of Balance Sheet

• Current and Noncurrent Assets
• Current and Noncurrent Liabilities
• Equity
• Balance Sheet Elements
• Major Balance Sheet Disclosures
• Limitations of Balance Sheet
• Off-Balance Sheet Financing

INCOME STATEMENT

• Elements of Income Statement

• Cost and Expenses Items
• Income Statements
• Irregular Items
• Major Disclosures
• Limitations of Income Statements
• Statement of Comprehensive Income

STATEMENT OF CHANGES IN EQUITY AND EQUITY TRANSACTIONS

• Statement of Changes in Equity

• Statement of Retained Earnings
• Common and Preferred Stocks
• Issuance of Equity Stocks and related transactions

STATEMENT OF CASH FLOWS

REVENUE RECOGNITION-AFTER DELIVERY

• Instalment Method
• Cost-Recovery Method
• Deposit Method
• Buyback Agreements
• Right of Return
• Trade Loading

REVENUE RECOGNITION-BEFORE DELIVERY

• Completed Contract Method

• % Completion Method
CONCEPTS OF FINANCIAL ACCOUNTING

General-Purpose Reporting and its objectives:

• Primary means of communicating information-performance, position and cash

flows-Both IS & SOFP both
• The primary objective is to provide information useful in decision making-Both
• Relates to Entity’s economic resources and obligations - SOFP
• Changes in economic resources and claims (issuing debts & Equity)-Financial
position-SOFP
• Changes in economic resources and claims from performance-Income statement
• Helps in evaluating liquidity, financing needs and solvency-SOFP
• Predicting future returns-SOFP
• Evaluating management efficiency
• Evaluating Capital Structure-SOFP
• Understanding ROI-SOFP
• Assessing Liquidity and financial flexibility-SOFP
• Must follow GAAP/IFRS-external use
• Assists the external user to take decisions
• Must be relevant and faithfully represented, timely & reliable
• Must be comparable with other similar entities
• Must be prepared under going concern concept-indefinitely, hence liquidation
values not important

This set of financial statements is called “general purpose” because it consists of the basic
financial statements that can be used by a broad group of people for a broad range of
activities. Companies use this set of financial statements as a form of financial reporting to
communicate company performance with the people outside of the organization.

• Liquidity

• Solvency

• Financial needs

• Obtaining financing

Management Accounting

• For internal use, need not follow GAAP

• Assists management in decision making, planning and control
• More precise
• Focuses on future, forward looking and “prospective”

Users of Financial Statements-those with direct interest and indirect interests

Users with Direct Interests

• Both external/Internal-Usually investors and who manage the business

• Investors, Suppliers-external
• Employees-Internal-negotiate salary
• Management-Internal-to evaluate performance, assess strengths and deficiencies

Users with Indirect Interests-advise, represent and influence

• External only
• Financial Advisors and Analysts & Regulators
• Stock exchanges
 Correct Answer: D
Accrual-basis amounts used in financial reporting are not useful to managers
making day-to-day operating decisions. The practice of management accounting
fulfils the needs of these users.

Financial statements – full set include

• Statement of financial position-SOFP-can get ROI, evaluate capital structure,

assesses liquidity
• Income Statement-IS-determines performance (profit or loss)
• Statement of Comprehensive Income-SOCI
• Statement of Cash Flows
• Statement of Changes in Equity-SCIE

The notes to the financial statements describing significant accounting policies such as
use of estimates (depreciation methods etc), revenue recognition rules are also
considered an integral part of the financial statements but are not an actual financial
statement. The purpose of the notes is to provide informative disclosures required by US
GAAP.

The notes should not be used to correct the improper presentation in the fs. The notes
enable understand the financials

Apart from the full set as above, the FS may also be accompanied by management
discussion and analysis(MDA), although not a part of the full set.

Financial statements must be:

• Relevant
• Faithfully represented
• Comparable (past and others)
• Based on going-concern assumption (1 yr.)

Financial statements complement each other

 • Different aspects of the same transaction
• Components of one statement relate to those of others
• Net income or loss shown in Retained Earnings
• Cash and Cash equivalents from BS reconciled in Statement of Cash Flows
• Ending inventory shown on BS and used in COGS of Income Statement
• Depreciation shown on BS and also as expense on Income Statement
• Income>R/E, Cash>SOCF, Equity reconciled, Depreciation/Amortization>BS

Correct Answer: D

Financial statement notes should not be used to correct improper presentations.

The financial statements should be presented correctly on their own. Notes should
be used to explain the methods used to prepare the financial statements and the
amounts shown. The first footnote typically describes significant accounting

policies .

Accrual Basis of Accounting

• Accrual accounting records the financial effects of transactions and other events
and circumstances when they occur rather than when their associated cash is
paid or received.
• For the CMA exam assume that all is on an accrual basis
• Rev and expenses are recognized in the period in which they are earned/occurred
o Accrual
o Deferral
• GAAP allows only accrual basis
• Revenue and expenses are shown in the period they occur
• Payment received and paid or not does not matter
 Correct Answer: A
The future inflow of economic benefits is not sufficiently certain given that the
entity has not done what is required to be entitled to those benefits. Thus, the
receipt of cash in anticipation of goods to be delivered or services to be
performed must be recognized as a liability, usually called deferred (or unearned)
revenue or deferred (or unearned) income

MCQ-1-3

STATEMENT OF FINANCIAL POSITION-SOFP

• Also called Balance Sheet

• Reports Assets, Liabilities and Owners’ Equity at a point of time
• Informs us about the liquidity, financial flexibility and risks
• Capital by owners/investors called Equity
• Capital by outsiders are liabilities
• Assets=Liability + Equity

Elements of BS

Assets

• Resources controlled by the entity as a result of past events

• Probable future economic benefits to the firm
• Non-Current Assets-PPE, Intangible assets (non-financial assets like goodwill and
patents, Customers list etc), Certain AFS & HTM Investments not qualifying as
current, Non-current receivables, Restricted Cash, Long-term prepayments,
Deferred Taxes
• Current Assets-Cash and Bank, Receivable, Inventory, Trading investments, AFS
Investments, HTM Investments, Prepaid Expenses etc-Expected to be realized or
realizable or consumed within the operating cycle or 1 year w.e is longer
• Inventory measured at lower of cost or market value
• Accounts receivable valued at realizable value
• The value of current assets in the BS need not necessarily reflect the realizable
cash values
 • Reported in the BS in the order of liquidity

Liabilities

• Obligations arising out of past events

• Loans payable, bonds, accounts payable, accruals and provisions etc
• Settlement of liabilities result in outflow of resources
• Current and Non-Current
• Current-Trade payable, Unearned revenue, short-term notes, current portion of
non-current liability, warranty obligations, to be settled within 1 year from the BS
date.
• Non-current-not qualifying as current. Current portion of non-current can also be
shown as non-current if refinancing agreement in place with ability and intentions

Equity

• The residual interest in the assets of the entity after subtracting all its liabilities
• Common Stocks, Preferred Stocks, APIC, Retained Earnings, Accumulated
Comprehensive Income, Non-Controlling Interest(NCI)
• Increases when investors invest
• Decreases when assets transferred to owners

Correct Answer: D
Assets are usually measured at original historical cost in a statement of financial
position, although some exceptions exist. For example, some short-term
receivables are reported at their net realizable value. Thus, the statement of
financial position cannot be relied upon to assess NRV.

Correct Answer: B
Short-term obligations expected to be refinanced should be reported as current liabilities
unless the firm both plans to refinance and has the ability to refinance the debt on a long-
term basis. The ability to refinance on a long-term basis is evidenced by a post-balance-
sheet date issuance of long-term debt or a financing arrangement that will clearly permit
long-term refinancing.

Correct Answer: C
Accounts payable are properly classified as current liabilities because they are for items
entering into the operating cycle. Short-term debt that is refinanced by a post-balance-
sheet-date issuance of long-term debt should be classified as noncurrent. (The ability to
refinance on a long-term basis has been demonstrated.) Thus, the short-term construction
loan is classified as noncurrent. Accordingly, the entity records current liabilities of
$30,000 and noncurrent liabilities of $100,000

Stop and look at the Appendix B -Financial Statements-formats etc-Page 478,

Treasury Stock

• Purchasing own stock

• Can be reported at par-deduct from the contributed capital
• Can be reported at cost-reduce from the total equity

Major Balance Sheet Disclosure

• Describe significant accounting policies (estimates and revenue recognition basis)

• Investment Securities
• Maturity pattern of bond issues
• Significant uncertainties
• Pending litigations
• Capital stock details

Limitations of BS

• Shows position at a single point of time

• At historical cost
• Requires estimates and judgement

Off-Balance Sheet financing-not debt-not reported but disclosed

Off-balance-sheet financing is an accepted accounting method for recording assets and
liabilities so that they are not shown on the balance sheet

In off-balance sheet financing, large capital expenditures are kept off a company's balance
sheet to keep the debt to equity (D/E) and leverage ratios low, especially if the inclusion
of a large expenditure would break negative debt covenants. Examples of off-balance-
sheet financing include joint ventures, research and development (R&D) partnerships, and
operating leases, where the asset itself is kept on the lessor's balance sheet, and the
lessee reports only the required rental expense for the use of the asset.

• Some liabilities exist, but are not shown in the BS

• Use of Operating lease-assets in lessors BS
• JV Debts-members debts are reflected in the financials
• R&D Partnership
• Factoring-even though the firm remains contingently liable, no need to report this
in BS
• SPV-another firm for the sole purpose of keeping the liabilities associated with a
specific project off the parent’s books

With any of these activities, the liability does not appear on the company’s balance sheet
and hence, Off-BS items will make the company appear less risky than it is really.

But, debt covenants (the activities prohibited under the debt agreement) is not an off BS
item

Debt covenant-is a promise in a formal debt agreement that certain activities will or will
not be carried out. Covenants in the finance most often relate to terms in a financial
contracting, such as a loan document stating the limits at which the borrower can acquire
additional funds.

Covenants are put in place by vendors to protect themselves from borrowers defaulting
on their obligations due to financial actions detrimental to themselves.

Off-balance sheet financing is any form of funding that avoids placing owners’ equity,
liabilities, or assets on a firm’s balance sheet. One purpose of some forms of off-balance
sheet financing is to decrease the reported debt on the company’s balance sheet.
Decreasing the reported debt can make the company’s capital structure ratios appear more
favorable.

For example, debt to equity and debt to total assets ratios will be lower, which may result
in more favorable financing terms from lenders or help the company meet the covenants
imposed on it by its lenders or by its bond indentures.20 However, when off-balance sheet
financing is used to hide debt and deceive investors, creditors, and regulatory authorities,
such actions are not appropriate or ethical.

Off-balance sheet financing can be accomplished through the following means:

• Operating leases to finance acquisition of assets. An operating lease is accounted for

like a rental. The lessee does not record the asset on its balance sheet and does not record
any liability connected to the future lease payments. This accounting treatment contrasts
with a finance lease in which the lessee records an asset and a liability equal to the present
value of all of the future lease payments. When an asset is acquired with an operating
lease, no liability is recorded on the balance sheet.
Note: There will be new standards in US GAAP and IFRS that essentially eliminate the
operating lease as an option. When the new standard goes into effect, all leases will be
recorded as both an asset and a liability on the lessee’s balance sheet, similar to but
different than the way capital leases are currently reported.

• Selling receivables, also called factoring, in which the company can receive access to
cash immediately in exchange for giving up the right to collect its receivables. A company
may choose to automatically sell all of its receivables in order to avoid the cost of having
to collect and possibly avoid the risk of bad debts.

• A joint venture, which is a partnership created for a limited purpose and usually for a
limited period of time. Sometimes it is formed to fulfill a large or risky contract that one
contractor alone cannot perform. A separate set of accounting records is maintained for
the joint venture. Each participating contractor reports a single line asset balance:
“investment in and advances to joint ventures.” In addition, each participating contractor
records its share of the joint venture’s income as a single line item on its income statement
as in the equity method for investments.

• Non-consolidated subsidiaries, where the parent company’s ownership is less than

50%. If the parent company does not have control over a subsidiary in which it has less
than 50% ownership, it does not report the assets and liabilities of the subsidiary on its
balance sheet.

• In some cases, variable interest entities can constitute a form of off-balance sheet
financing. Variable interest entities are separate legal entities established to perform a
narrowly defined or temporary purpose, and their assets and liabilities may be carried on
that variable interest entity’s balance sheet instead of on the firm’s balance sheet.
However, variable interest entities are subject to special requirements to be used in
determining if their financial statements must be consolidated with those of another firm.
If they do not qualify for non-consolidation, variable interest entities must be consolidated
and thereby lose their off-balance sheet financing status.

Solve MCQ 4 to 10

INCOME STATEMENT

Results of a company’s operations during a given period of time

Income (Loss) = Revenue+ Gains - Expenses – Losses

Revenue=Sales and Services and other inflows from operations and settlement of
liabilities-increases equity

Gains= not part of the company’s main or central operations and that do not result from
revenues or investments by the owners of the entity-increases equity

Expenses = Usages of assets, cost of goods and services-decreases in equity

Losses = not part of the company’s main or central operations and that do not result
from expenses or distributions made to owners of the entity.

Notes:
Transactions with owners are not either revenue, expenses, losses or gains

Cost of Goods Sold-Trading-explain in class

Opening Stock

Purchase-CIF

= Goods Available for Sale-AFS

- Closing Stock

= COGS

Cost of Goods Sold-Manufacturing

Opening Inventory of FG

COGM

- Closing FG

= COGS

________________________________________________________________

COGM

Opening WIP

DM

DL

MFOH-Fixed & Variable both

Less Closing WIP

Please refer to the examples on page 16

Single-Step Income Statement

Adds all revenues & gains and all expenses & losses and subtracts the later from the
former in a ‘single step’
Gross profit does not appear in single step income statement

Income and loss from continuing and discontinued operations do not appear separately
Multiple-Step Income Statement

For a retail organization, dividend and interest revenue etc are non-operating and hence
shown as other revenue and not part of operating revenue.

Discontinued operations

Discontinued operations are a component of a company’s core business or product lines

that has been disposed of, and is reported separately from continued operations on the
income statement, so investors can clearly distinguish the profits and cash flows from
continuing operations from activities that have ceased

Discontinued operations are reported when following conditions met:

• Management commits to a plan to sell the entity.

• The entity to be sold is available for immediate sale.
• An active program to locate a buyers or buyers and other actions required to
complete the plan to sell the entity have been initiated.
• The sale is probable within one year, unless events beyond the entity’s control
occur.
• The entity is being actively marketed at a reasonable price in relation to its fair
value.
• Actions required to complete the plan to sell the entity make it unlikely that the
plan will be withdrawn or significantly changed.

Gain or Loss from Discontinued Operations:

• Is a separate item in the IS after income from continuing operations and is shown
at net of tax
• If the discontinued operations have been sold, show gain or loss
• It can be shown both in single-step and multiple-income statement
Correct Answer: A
Extraordinary items are reported net of tax after discontinued operations

Correct Answer: D
Certain items ordinarily are not to be treated as extraordinary gains and losses. Rather,
they are included in the determination of income from continuing operations. These gains
and losses include those from write-downs of receivables and inventories, translation of
foreign currency amounts, disposal of a business segment, sale of productive assets,
strikes, and accruals on long-term contracts. A write-down of inventory is therefore
included in the computation of income from continuing operations.
Incorrect Answers:
A. Discontinued operations are reported separately from income from continuing
operations
B. Extraordinary loss is reported separately from income from continuing operations.
C. A cumulative effect of a change in an accounting principle is not reported in the income
statement.

Notes to the Accounts-Disclosure related to IS

• EPS-Earning Per Share

• Depreciation Schedule
• Components of Income Tax Expenses
• Components of pension expenses

Limitations of Income Statement

• Does not show all items, some as shown in OCI

• Revenue and expenses are on accrual basis and hence do not portray cash

Again, this IS require estimates and management judgement

Prior period adjustments include

• Cumulative effects in accounting principles

• Corrections of prior financial statements
• Beginning balance of Retained Earnings is adjusted

Share based payments

The share based payments are awards (share options or shares ) and which generally
vest upon meeting specified conditions such as either service conditions or performance
conditions.

Some entities also issue shares or share options to pay suppliers, such as providers of
professional services.
When a company acquires or receives goods and services for equity-based payment.

These goods can include inventories, property, plant and equipment, intangible assets,
and other non-financial assets

IFRS 2 requires an expense to be recognised for the goods or services received by a

company.

The corresponding entry in the accounting records will either be a liability or an increase
in the equity of the company, depending on whether the transaction is to be settled in
cash or in equity shares

There may be share-based payments arranged with the employees. The payment could
include
• Call options-the right to purchase shares
• Share appreciation rights-cash payment to employees based on the share price
increase
• Share ownership-employees get shares
The goods services to be measured based on the fair value of the share-based payments

STATEMENT OF COMPREHENSIVE INCOME-SOCI

Comprehensive Income consists of:

 • Net Income or loss from the business/operation
• Other Comprehensive Income- Some items which are not shown in IS

Other Comprehensive Income:

❖ Four items that appear in OCI-reported in stock holders’ equity

▪ Effective portion of cash flow hedge-gain or loss
▪ Unrealised holding gains and losses due to change in the fair value
of AFS
▪ Translation gains and losses for financial statements of foreign
operations
▪ Defined benefit post retirement plans
❖ Those items result in increase or decrease in equity/net assets though not from the
core operations and from owners’ transactions like investments by and distribution
to owners

❖ These components of comprehensive income are not included in the determination

of net income are included in OCI

Comprehensive Income can be presented in 2 ways:

• Can be one continuous single statement with 2 sections, net income and OCI
• 2 separate statements but consecutive with components of OCI presented
-

One continuous single statement

2 separate statements but consecutive with components of OCI presented

Refer to the format of SOCI-page 19

Please solve MCQ 11 to 16

STATEMENT OF CHANGES IN EQUITY

Beginning Bal Total Common R/E Accumulate Treasury Additional-

Equity Stocks d OCI Stocks Paid-In
Capital
Beginning Bal X X X X X X
Net Income(Loss) X ()
Prior Period X
adjustments
OCI X X
Stocks issued X
Treasury Stocks (X) X
brought
Sale of Treasury X (X)
Stocks
Cash Dividends (X)
Stocks Dividends X (X)
Ending Balance

APIC-Additional Paid-in-Capital-the discount or premium on issue of shares

Prior period adjustments-retrospective effect-adjust the carrying amount of

assets/liabilities in current period

• Cumulative effect of changes in accounting principles-methods of valuation

• Corrections of errors in prior period financials

Please refer to the examples on page 18,19 & 20

Common and Preferred Stocks

Authorised-maximum stocks legally authorized to issue

Issued Capital-Stocks issued out of authorized

Stocks Outstanding-Currently held by share holders

Common Stocks Vs Preferred Stocks

Items of description Common Stocks Preferred Stocks

Owners of the firm Yes No
Voting Rights Yes No
Dividends If declared by BOD Must
Dividends Arrears payment No If cumulative
Dividends rate Not fixed fixed
Profit participation Yes If participating
Upon liquidation Get at the last Priority, but after creditors
Pre-emptive rights Yes No
Presented in the Equity Yes Yes
Section
Convertible to Common NA Depends if convertible
stocks

Equity Transactions-that affects equity

 • Issuance of Stock
• Cash Dividend declaration
• Stock Dividend
• Stock Split
• Property Dividend

Issuance of Stock

• Discount or premium will be credited to APIC

• Direct costs of Stocks issue will not be expensed and will not go to PL-it will be
reduced from APIC

Dividend

• Date of declaration-date BOD approves

• Date of record-the date of entitlement-record date
• Date of payment-dividend paid

Stock Dividend

• No cash distribution
• Dividend in kind-shares
• Results in re-classification of different equity accounts
• Recipient maintains same holding/ownership %
• Fair value of the stocks is re-classified from R/E to Common Stocks (at par) and
to APIC (difference)

Property Dividend

• Tangible property declared as dividend

• Remeasure the property to its fair value on the date of declaration and adjust the
carrying amount
• Recognise the gain or loss in IS
• Debit R/E for the fair value of property to be distributed

Refer to the example on page 23

kStocks Splits

• Aggregate par value of the outstanding shares remain unchanged

• Par value of each stock changes
• Number of shares outstanding increases
• No entry in books

Example of a Stock Split

Before announcing a stock split, a firm's board of directors must first decide on a
distribution rate. Typically expressed as a ratio (such as 2-for-1, 3-for-1, etc...), this
distribution rate will determine exactly how many shares of stock the firm hands over
 to its existing shareholders.

Let's assume XYZ Corp, which has two million shares outstanding, is trading for $30. In
this case, the firm's total market value, or market capitalization, is $60 million (2
million x $30/share). After a two-for-one stock split, the firm's number of shares will
double to four million, while the value of those shares will be cut in half to $15. However,
the company's total market capitalization will remain the same at just $60 million (4
million* $15/share).

Taken from another perspective, let's suppose you held 100 shares of XYZ before the
split. Prior to the split this total position would have been worth $3,000
(100*$30/share). After the split takes place you will then hold twice as many shares
(200 shares), but the firm's share price will be cut in half to $15. The net value of your
position will remain unchanged at $3,000 (200*$15/share).

In the end, splits accomplish little more than simply slicing a pie into thinner pieces.
Though an investor may acquire more of those slices, or shares, after a split, neither
the company's value nor his/her ownership interest will materially change.

Refer the example in page 22 & 23

Disclosure related to Changes in Equity

• Class of stock
• Share-based payment compensation
• Dividends
• Retained Earnings
• Stock Holders’ Equity.

Correct Answer: D
Treasury stock is a corporation’s own stock that has been reacquired but not
retired. In the balance sheet, treasury stock recorded at cost is subtracted from
the total of the capital stock balances, additional paid-in capital, retained earnings,
and accumulated other comprehensive income

Incorrect Answers:
A. Treasury stock is not an asset. A corporation cannot own itself
B. Treasury stock accounted for at cost is subtracted from the total of the other
equity accounts
C. Treasury stock accounted for at cost is subtracted from the total of the other
equity accounts

Please solve MCQ 17 to 21

STATEMENT OF CASH FLOWS-INDIRECT METHOD/RECONCILIATION METHOD

Cash receipts and payments during a period-primary purpose

Explains the change in cash and cash equivalent during a period, reconciles beginning
bal with ending bal

Helps user to assess the entity’s ability to:

• Generate positive future net cash flows-liquidity

• Meet obligations-solvency
• Financial flexibility

Activities:

• Operating
• Investing
• Financing

Operating activities

• Primarily derived from the principal revenue-producing activities

• Not financing or Non-operating
• Add to the Net Income, all non-cash expenses
• Adjust changes in WC
• Purchase, sale and maturity of trading securities

Investing Activities

• Capital Expenditures for future income-acquisition and sale of PPE/Intangibles

and other long-lived assets
• Investments in debt or equity in other entities
• Loans and advances given to and taken from other entities
• Purchase of stocks-in other entities
• Sale of fixed assets

Financing Activities

• Issue, settlement and reacquisition of debt or equity instruments of the entity, its
own
• Dividend payments
• Treasury Stocks transactions
• Capital lease payments
• Loans and Borrowings and settlements of principal portion

Note

The exchange of debt for a long-lived assets does not involve a cash flow. It is therefore
classified as a noncash financing and investing activities
Non-cash investing and financing activities

Statement of cash flows reports only those operating, investing and financing activities
that affect cash or cash equivalents. However, some non-cash investing and financing
activities may be much important for the users of financial statements because they may
have a significant impact on the current and future performance in terms of revenues,
profits and the ability of the entity to generate positive cash flows.

Therefore, both IFRS and US GAAP require companies to disclose all significant non-cash
investing and financing activities either at the bottom of the statement of cash flows as a
footnote or in the notes to the financial statements.

Examples:

Some examples of non-cash investing and financing activities that may become significant
for the users of financial statements and are given below:

• Issuance of stock to retire a debt

• Purchase of an asset by issuing stock, bonds or a note payable.
• Exchange of non-cash assets.
• Conversion of debt to common stock.
• Conversion of preferred to common stock.

Correct Answer: D
 In general, the cash flows from transactions and other events that enter into the
determination of income are to be classified as operating. Cash receipts from sales
of goods and services, from interest on loans, and from dividends on equity
securities are from operating activities. Cash payments to suppliers for inventory;
to employees for wages; to other suppliers and employees for other goods and
services; to governments for taxes, duties, fines, and fees; and to lenders for
interest are also from operating activities. However, distributions to owners (cash
dividends on a company’s own stock) are cash flows from financing, not operating,
activities

Correct Answer: A
The primary purpose of a statement of cash flows is to provide information about the cash
receipts and payments of an entity during a period. If used with information in the other
financial statements, the statement of cash flows should help users to assess the entity’s
ability to generate positive future net cash flows (liquidity), its ability to meet obligations
(solvency) and pay dividends, the need for external financing, the reasons for differences
between income and cash receipts and payments, and the cash and noncash aspects of
the investing and financing activities

Correct Answer: C
The indirect method begins with net income and then removes the effects of past deferrals
of operating cash receipts and payments, accruals of expected future operating cash
receipts and payments, and net income items not affecting operating cash flows (e.g.,
depreciation).

Refer and solve the example in page 27 & 28

Please solve MCQ 22 to 27

Direct Method of Cash Flows

This method looks directly at the source of the cash flows and reports it on the
statement

The problem with this method is it’s difficult and time consuming to create

Not sufficient for forecasting the profitability as non-cash items are not included in the
calculation of CFO

The investing and financing activities are reported exactly the same on both reports.

The indirect method, on the other hand, computes the operating cash flows by adjusting
the current year’s net income for changes in balance sheet accounts.

This is the only difference between the direct and indirect methods

This is why FASB has never made it a requirement to issue statements using this
method.

Indirect Method of Cash Flows

REVENUE RECOGNITION POLICIES-AFTER DELIVERY

General principle:

Sale of Goods-Recognise revenue and gains when:

• Revenue should be recongnized on accrual basis

• Realised (exchanged for cash or claims to cash) or
 • Realizable (exchanged to assets that are readily convertible to cash or claims to
cash) & earned (when full process completed)
• Risks and rewards of ownership transferred
• No continuing management involvement/control retained
• Consideration reliably measurable
• Economic benefit will flow to the entity and
• Transaction cost can be reliably measured

Rendering of Services-2 more conditions as below

Under % of completion method, cost incurred and cost to complete measurable

Even though cash is not received

Usually, revenue is recognized at the point-of-sale, or when the customer receives the
item.

However, in some situations revenue is not recognized at the point-of-sale and sometimes
other factors are involved in the recognition of revenue. These situations are:

• The instalment method of profit recognition

• The cost recovery method of profit recognition
• The deposit method
• Sales when the right of return exists
• Sales with a buyback agreement
• Channel stuffing or trade loading
• Long-term contracts
• Revenue recognized at the completion of production

Correct Answer: B
Revenues should be recognized when (1)realized or realizable and (2) earned. The
most common time at which these two conditions are met is when goods are
delivered, or services are rendered

Instalment Payment Method-only profit recognized, no Revenue and no COGS

The instalment method is only acceptable when receivables are collectible over an
extended period and no reasonable basis exists for estimating the degree of collectively

• Receivables are collectible over an extended period

• No reasonable basis exists for estimating collectability
• The revenue and cost of goods sold related to instalment sales are not reported
on the income statement—only the recognized gross profit is reported
• Book partial profit on each instalment collected
 • Profit to be recognized each period is hence a realized profit, GP% on the receipt
over cost of sales

GP % = GP /Instalment sales

Entries on sales:

Instalment Receivable …………………….Dr-Total amount of instalments-BS item as contra to

Deferred GP

Inventory…………………………………….Cr-book value of inventory sold

Deferred Gross Profit………………….Cr-Profit-Contra to IR-shown net in the BS

In BS-shown as follows

Instalment Receivable

Less: Deferred GP

= Net Instalment Receivable

As and when we receive the cash will be collected, a part of deferred revenue will be
taken to P/L account.

Cash A/c…………………………….Dr

To Instalment Receivables………………..Cr

Deferred Gross Profit…………Dr

To Realized Gross Profit-take to P/L

(GP% on cash received)

Example:
ABC Ltd, on October 1,2017, sells a computer and agrees to a deferred payment plan
although it is uncertain about the collectability of all of the amounts. The payment plan is
a $1,000 down payment with the balance payable in 4 quarterly instalments of $1,000
each. The cost of goods is $ 3,000.1st instalment received on Dec 31, 2017

Pass the entries and show the AR and DR in BS as on Dec 31, 2017
October 1, 2017 when the sale is made and the down payment collected
To record the sale, the collection of the down payment, the receivable, and the deferred
gross profit.
Dr Instalment accounts receivable – 20X0 ...................... 5,000
Cr Inventory ...................................................................... 3,000
Cr Deferred gross profit – 20X0 ............................................ 2,000

Receipt of cash down payment

Dr Cash ................................................................... 1,000
Cr Instalment accounts receivable ........................................ 1,000

To recognize as gross profit 40% of the cash received from the down payment.
Dr Deferred gross profit – 20X0............................................ 400
Cr Realized gross profit ......................................................... 400

December 31, 2017 when the first quarterly payment is received

To record the collection of quarterly payment.
Dr Cash .......................................................................... 1,000
Cr Instalment accounts receivable – 20X0 ............................ 1,000

To recognize 40% of all of the cash received as profit.

Dr Deferred gross profit – 20X0............................................ 400
Cr Realized gross profit ......................................................... 400

At December 31, 2017, Jeffrey’s balance sheet should report the following:
Instalment receivable 3,000
Deferred gross profit (1,200)
Net instalment receivables 1,800

When payments are received on March 31, June 30, and September 30 of 20X1, the
same two sets of
entries will be posted as are shown above for December 31, 20X0.

Please refer to example in the page 30 & 31

Cost Recovery Method-similar to Instalment Sales method, even more

conservative

• There is a doubt on the recovery

• No profit until the collections exceed the COGS, hence defer all profit the same
way like in Instalment sales
• Revenue only when collection received is in excess of the cost of sales

Entries

To record the sales:

Cost Recovery Accounts Receivable……………….Dr-Total amount of sales-BS item as contra

to Deferred GP

Inventory…………………………………….Cr-book value of inventory sold

Deferred Gross Profit………………….Cr-Profit-Contra to IR-shown net in the BS

When receive collection:

Cash A/c………………………………………Dr

Cost Recovery AR …………………Cr

(Keep on crediting Cost Recovery Ac on receipt of cash until the total collection exceeds
the cost, then Realized Gross Profit)

Deposit Method

• Sales criteria/process not met/still pending

• Seller continues to own the property
• No profit as not sold
• Cash received treated as a liability

Cash…………Dr
Deposit Received(Liability)……Cr

The funds lie as liability until such time the sale is recognized with all criteria met

Right of Return

When sales happen with an understanding that unsatisfactory goods may be returned

Sales conditions are met but goods may be returned back later

Receivable ………………. Dr

Sales ………………Cr

(usual sales entry)

…………

Sales Return………Dr(Contra Sales)

Allowance for Sales Returns (Contra AR)…Cr

(For estimated Sales Return)

…………………………

Inventory-Adjustments for sales return………….Dr (Current assets, separately shown from

Inventory)

COGS-adjustments for estimated sales return…….Cr

(For estimated Sales Return)

......................................

If sales conditions not met-Only Inventory and no Sales entry-watch the entry below

AR………….Dr

Inventory…………Cr

Deferred GP…………Cr

If some return of goods arise-reverse the entries proportionately

Trade Loading or Channel Stuffing

Distribution channels are pushed with more products and forced to sale more than what
they can sell in the normal course of business by luring/persuading them with more offers,
discounts, incentives, rebates, extended payment terms. Even without the sales orders,

the shipment takes place.

The effect of this trade loading could be slow collection and hence high receivables

Please solve MCQ 28 & 29

REVENUE RECOGNITION POLICIES-BEFORE DELIVERY

In case of long-term construction contracts

New ledgers-CIP, Construction GP, Progress Billing

Income Statement-no reflection of Sales/Revenue, No expenses-but only Construction

GP

2 methods:

Completed Contract method-not allowed any more under IFRS

• All contracts costs accumulated in Construction in Progress A/c until the project is
complete.
• Records all amount billed in Progress Billings Ac
• These CIP and PB are contra to each other. CIP is an Inventory Ac and both are
current assets
• Revenue and GP are recognized only when the contract is complete

% Completion method for long term contracts

• All contract costs in CIP Ac

• All amount billed in Progress Billings Ac
• Revenue is recognized as and when the contract progresses

Steps to recognize the GP under % completed method

• Contract Price will be given and may also be revised, so take revised price
• Estimated Total Cost=Cost incurred till date + Estimated cost to complete
 • Calculate the Estimated GP=Contract Price – Estimated Total cost
• Ascertain % of work completed= Cost incurred till date to total estimated costs
• GP till current period = Work completed % of the Estimated FP
• GP for the current period=GP till current period – GP recognized till last period

Entries under % Completion method

Debit CIP Ac for all costs:

CIP ………Dr and Cash/AP …………..Cr

For Progress Billing:

AR……Dr and Progress Billing ………Cr

Calculate Estimated GP at each period end: CP-C-ECTC

Calculate % completed: Cost incurred/TEC

Calculate total GP till date: Completed % of Estimated GP

Deduct the GP already booked in prior period

Book the balance GP in current period:

CIP…………….Dr and Construction GP…………Cr

On collection:

Cash …………Dr and AR…………Cr

At the close of the project:

Progress Billing…………Dr and CIP……..Cr

( Note-for cost and gp both-CIP is credited)

CIP & Progress

Note: Estimated loss is recongized in full immediately

Solve the Example on page 34-& 35.

Example in page 35 is solved in tabular format in excel sheet, forwarded, if not received,
please ask me.

Also, solve the following Example as practice

CP-1,000, later revised to 1,050

EC-800

Progress Billing, Say-Year 1=150, Year 2=600, Year 3=300

Cash Recd in Year 1=110, Year 2 =450, Year 3=380

Particulars Year 1 Year 2 Year 3

Cost incurred 100 450 380
Actual cost incurred till date 100 550 930
ECTC 700 300 0
TEC 800 850 930
CP 1000 1000 1050
GP% 20% 15% 11.40%
EGP 200 150 120
% of works completed 12.50% 65% 100%
Estimated GP till now 25 98 120
Less: Profit booked 0 25 98
Profit -this period 25 73 22

CIP Ac

Period Ac Dr Cr
1 To Cash 100
1 To CGP 25
2 To Cash 450
2 To CGP 73
3 To Cash 380
3 To CGP 22
Total 1050

CGP Ac

Period Ac Dr Cr
1 By CGP 25
2 By CGP 73
3 By CGP 22
Total 120

Progress Billings Ac(BS-Liability-Contra AR Ac)

Period Ac Dr Cr
1 To CGP 150
2 To CGP 600
3 To CGP 300
Total 1050

ARs Ac

Period Ac Dr Cr
1 To PB 150
1 By Cash 130
2 To PB 600
2 By Cash 450
3 To PB 300
3 By Cash 380
Total 1050 960
Bal 90
Correct Answer: D
When the current estimate of total contract costs indicates a loss, an immediate provision
for the entire loss should be made regardless of method. Thus, under either method, Year
1 operating income is decreased by the projected loss.

Correct Answer: D
The percentage-of-completion method recognizes revenue based on the stage of
completion of the contract. One typical method for estimating the stage of completion is
the calculation of ratio of the contract costs incurred to date to the estimated total costs.
The percentage-of-completion at year-end on the cost-to-cost basis is 35% ($700,000
÷$2,000,000). The gross profit for Year 1 is the anticipated gross profit on the contract
times the completion percentage.

Thus, profit for Year 1 is $350,000 [($3,000,000 –$2,000,000) ×35%].

Please solve MCQ 30 & 31 and Case Study