Exam Resource

Congratulations on becoming a CMA candidate. Passing the exams and receiving your certification will be a major accomplishment and should further your career significantly. The material presented below is designed to help you prepare for the exams. We discuss certification exams in general as well as characteristics of the CMA exams. The discussion is intended to give you a general understanding of the purpose of the CMA and how the exams are constructed. Also discussed are the different types of exam questions, the cognitive levels tested, and how the exams are scored. CERTIFICATION TESTING The Certified Management Accountant (CMA) examination program is a certification test. The primary purpose of certification tests is to establish and maintain a standard of professional competence within a profession, with the ultimate aim of protecting the public. The requirements of the CMA Programs have been established to recognize those who can demonstrate that they possess a sufficient degree of knowledge and skills in the areas of management accounting and financial management. In this way, the ICMA helps identify practitioners who have met certain predetermined professional standards. Like most occupational certification tests, the CMA exams are examples of criterion-referenced tests. A criterion-referenced test is one in which a candidate’s performance is compared to a predetermined standard or passing score. In criterion-referenced testing, the interpretation of an examinee’s score does not depend on the performance of other examinees. Pass or fail status is instead determined by comparing the individual candidate’s score with the passing or “cut” score. If a score at or above the cut score is achieved, the examinee passes the test; if a score is below the cut score, the examinee fails the test. EXAM CONSTRUCTION AND CHARACTERISTICS The CMA exam parts 1 and 3 consist of 110 multiple-choice questions and the CMA exam part 2 consists of 140 multiple-choice questions, which are often referred to as items. The items that comprise the exam part you will be taking are randomly selected from a large database of items. The CMA part 4 is a written-response exam consisting of 4-7 essays/problems. Your particular test is referred to as a “form” and has been selected in accordance with preset instructions to provide adequate coverage of all topics and cognitive levels. The principles that are used in the construction and administration of the exams are discussed below. Validity Validity refers to the appropriateness, meaningfulness, and usefulness of a test score. The objective of test validation is to ensure that the test measures what it is intended to measure. The CMA exams are content-valid tests of accounting and financial knowledge, meaning that the content of the exam reflects the tasks, knowledge, skills, and abilities associated with the profession. Such information is obtained through a job analysis, which is a systematic study of the duties and requirements of a profession.

To maintain validity in the examination process, the CMA exams are constructed according to a precise plan or “blueprint,” so that the various topic areas included in the exams are not over- or under-emphasized. The test forms are constructed to be parallel, which means that the number of items appearing in each major content area is exactly the same from form to form. In this way, the exams contain the same content balance, thereby maintaining the same test conditions for all candidates, regardless of when they actually take the test. Reliability Reliability refers to the degree of consistency, dependability, or accuracy of a test score. The more reliable the test, the less error due to chance in the test scores. Reliability for the CMA exams is computed though a number of standard statistical measures. To maximize reliability, analysis and improvement of test questions are continuously carried out. Item Development Since the test items are the "building blocks" of the examinations, it is important that they be written in a sound, coherent fashion that is free of ambiguities. Accordingly, the ICMA employs a systematic approach for developing test items. All CMA items are reviewed by committees of subject matter experts. Only those items that pass the scrutiny of the review committees and the ICMA examination staff are included within the test. TYPES OF EXAM QUESTIONS All items within the CMA parts 1, 2 and 3 are of the 4-option multiple-choice type, with one and only one correct answer for each question. There are, however, a number of variations on this type of item used in the CMA exams. In the examples below, the term “stem” refers to all the information that precedes the answer options or alternatives. Closed Stem Item This item type is characterized by a stem that is a complete sentence which concludes with a

question mark. The options may be complete or incomplete sentences.

Example: Which one of the following would have the effect of increasing the working capital of a firm? a. Cash payment of payroll taxes payable. b. Cash collection of accounts receivable. c. The purchase of a new plant, financed by a 20-year mortgage. d. Refinancing a short-term note with a two-year note. Key = d

Sentence Completion Item This type of item is characterized by a stem that is an incomplete sentence. The options

represent conclusions to that sentence.

Example: If a product’s elasticity coefficient is 2.0, this means the demand is a. perfectly elastic. b. elastic. c. inelastic. d. perfectly inelastic.

Key = b Except Format This type of item is employed when you are required to select the option that does not “fit.” In

this case, three of the options will fit or be defined by the stem, and one option (the correct option) will not fit. A variation on this type of question is to use the word not instead of except in the stem, in the form of “Which one of the following is not...”.

Example: All of the following are considered tangible assets except a. real estate. b. copyrights. c. prepaid taxes. d. accounts receivable.

Key = b

Most/Least/Best Format This type of item requires you to select an option which is either better or worse than the others.

In all cases, the correct answer represents the collective judgment of a group of experts within the field. Example #1: Which one of the following best describes a production budget?

a. It is based on required direct labor hours.

b. It includes required material purchases. c. It is based on desired ending inventory and sales forecasts. d. It is an aggregate of the monetary details of the operating budget. Key = c

Example #2:

Which one of the following is least likely to help an organization overcome

communication problems between the Accounting Department and other departments? a. Job rotation. b. Cross-functional teams. c. Written policies and procedures. d. Performance appraisals. Key = d

All items within the CMA part 4 are written-response questions, which will be delivered via computer at Prometric Testing Centers in the same manner as the other exam parts. For these questions, you will have a text box in which to type your response. QUESTION LEVELS

In addition to the variety of item formats described above, the CMA exams present test items at varying cognitive levels. These levels range from questions that require a recall of material to questions that require a sophisticated understanding such that you must apply your knowledge to a novel situation, or judge the value of information as it may apply to a particular scenario. A description of each of these levels, along with sample questions, appear below. The cognitive level required for each major topic area of the CMA exams is shown in the Topic/Resource outline.

Level A This cognitive level represents the “lowest” or most basic level, and includes items that require the recall of facts and the recognition of principles. This level includes the categories of knowledge and comprehension.

Knowledge: This is the lowest level of learning. Items in this category are those that require the recall of ideas, material, or phenomena related to the topic of interest. In these questions, you will be asked to define, identify, and select information.

Example:

A market situation where a small number of sellers comprise an entire industry is known as

a. a natural monopoly.

b. monopolistic competition. c. an oligopoly. d. pure competition.

Key = c To correctly respond to the item above, you must recall the textbook definition of an oligopoly. Comprehension: Items in this category require you to grasp the meaning of the material presented in some novel way. A question testing for comprehension describes some principle or fact in words different from those used in textbooks, and often uses a situation as a way to present the idea. In order to answer the item correctly, you must recognize the principle demonstrated in the problem; memory alone will not be sufficient for identifying the correct answer. Example: Social legislation, such as the Occupational Safety and Health Act (OSHA) and the Environmental Protection Act (EPA), is frequently criticized for being inefficient because the agencies

a. use flexible rather than rigid standards. b. rely heavily on the free market to allocate resources. c. rarely consider the marginal benefits relative to the marginal costs. d. enforce their policies too leniently. Key = c

In order to answer this item correctly, you must know something about the issues or principles in connection with OSHA and the EPA. Other questions dealing with this level of testing are those that ask you to identify an option which best explains, illustrates, or provides an example of the concept in question.

Level B This cognitive level includes items that test for the application of material to novel situations and the ability to analyze or break down information into its component parts. Items that require application or analysis are included in this level.

Application: Items in this category measure understanding of ideas or content to a point where you can apply that understanding to an entirely new situation. The objective of these items is to test whether you can use the knowledge in an appropriate manner in a real-life situation.

Example: The balance sheet for Miller Industries shows the following. Cash $ 8,000,000 Accounts Receivable 13,500,000 Inventory 7,800,000 Prepaid Expenses 245,000 Property, Plant, & Equipment 4,700,000 Based on this information, what are the Total Current Assets for this firm?

a. $21,500,000. b. $29,300,000. c. $29,545,000. d. $34,245,000. Key = c

Rather than rely on memory or comprehension alone, the situation presented in this item requires you to draw on your knowledge of the calculation of Total Current Assets and apply that knowledge to the particular data presented in the problem. Other items dealing with this level of testing might ask you to identify a specific situation requiring a certain course of action, or the most appropriate procedure or steps to apply to a particular problem.

Analysis: Analysis involves the ability to break down material into its component parts so that its organizational structure can be understood. It involves the ability to recognize parts, as well as the relationships between those parts, and to recognize the principles involved. Items in this category ask you to differentiate, discriminate, distinguish, infer, and determine the relevancy of data.

Example:

A firm is considering the implementation of a lock-box collection system at a cost of $80,000 per year. Annual sales are $90 million, and the lock-box system will reduce collection time by 3 days. The firm currently is in debt for $3,000,000. If the firm can invest the funds designated for the lock-box at 8%, should it use the lock-box system? Assume a 360-day year.

a. Yes, it will produce a savings of $140,000 per year. b. Yes, it will produce a savings of $60,000 per year. c. No, it will produce a loss of $20,000 per year. d. No, it will produce a loss of $60,000 per year. Key = c

In this item, you are presented with a novel situation, and asked to identify the data that are relevant to the problem at hand, which in this case involves the determination of the savings or loss of implementing a lock-box type of collection system. You are required to apply principles to determine savings or loss, and then to make an analysis of the outcomes of the alternative courses of action.

Level C This cognitive level is considered the “highest” or most challenging level, and includes items that require you to evaluate information.

Evaluation: Items in this category are those that require the ability to judge the value of material for a given purpose, based on definite criteria. These questions include those that ask you to appraise, conclude, support, compare, contrast, interpret, and summarize information.

Example:

A home services organization has been using the straight-line depreciation method for calculating the depreciation expenses of its equipment. Based on recently acquired information, the firm’s assistant controller has altered the estimated useful lives of the equipment. The corresponding changes in depreciation result in a change from a small profit for the year to a loss. The assistant controller is asked by the controller to reduce by half the total depreciation expense for the current year. Believing he is faced with an ethical conflict, the assistant controller reports the problem to the Board of Directors. In accordance with IMA’s Statement of Ethical Professional Practice which one of the following is the correct evaluation of the assistant controller’s action?

a. The assistant controller’s action was appropriate as an immediate step. b. The assistant controller’s action would have been appropriate only if other

alternatives had first been tried. c. The assistant controller’s action was not appropriate under any circumstances. d. Not enough information has been given to evaluate the assistant controller’s action.

Key = b

The situation presented in this item requires you to evaluate the course of action that the assistant controller has taken. Option b is the correct option. While the assistant controller’s action is appropriate, the situation may be resolved by less drastic means first. You are asked to make a judgment on the appropriateness of the actions to the situation described, and answer the question on the basis of this information.

STANDARD SETTING, EXAM EQUATING, AND SCALED SCORES Standard Setting As described previously, the CMA examinations are criterion-referenced tests, meaning that they are used to determine whether a candidate meets a certain threshold or standard of performance. Accordingly, the ICMA uses an accepted procedure designed for the purpose of determining the level of performance on the tests that actually constitutes passing. This procedure involves the collective judgment of a panel of subject matter experts within the fields of management accounting and financial management. Separate passing scores are established for all parts of the exams, and all pass/fail determinations are final.

Equating Since the actual items on the CMA exams are different from test form to test form, the different forms of the exam will vary in difficulty, in that some forms may contain somewhat more difficult questions than others. The same standard for passing the test is applied to all candidates, regardless of which form of the test they take. Thus, in order to maintain consistency in standards, the ICMA uses techniques of statistical equating to determine the equivalency of exams. The purpose of equating is to ensure that the passing scores on all forms of the exams are equivalent in terms of levels of difficulty. In this way, the same standard is maintained for all candidates, regardless of when and which test form they take. Scaled Scores All scores on the CMA exams are expressed as scaled scores, ranging from 200 to 700, with the passing score set at 500. The raw scores on the test (i.e., the number of items correct) are transformed to this scale for the purpose of maintaining uniformity and consistency in the way scores are reported, regardless of which test forms a candidate may take. FREQUENTLY ASKED QUESTIONS ABOUT THE EXAM How many questions are on the exam? There are 110 questions on the CMA exam parts 1 and 3. The CMA exam part 2 contains 140 questions. The CMA exam part 4 contains no fewer than four scenarios on any given exam and no more than seven scenarios. Each scenario contains several specific questions related to the scenario. How much time will I have to complete the exam? You have three hours in which to complete the CMA exam parts 1, 3, and 4. You will have 4 hours to complete the CMA exam part 2. When I take the exam, will I receive my score immediately? Yes, for the CMA exam parts 1, 2, and 3 you will receive a pass/fail notification and a scaled score on the computer screen, as well as a printout which will be embossed at the site attesting to its authenticity. The ICMA does not send a separate score notification until all required exam parts are completed.

The CMA exam part 4 written-response questions will not be graded on-line and, therefore, you will not immediately receive your grade on part 4. The questions will be graded by subject matter experts and partial credit will be given. For example, if you are asked to give three reasons why a selected alternative action is good for a business and you provide only two correct reasons, you will receive partial credit for these two responses. Likewise, for questions requiring a calculated response, partial credit will be given for a correct formula even though a mathematical error may have been made in the final number. Grades will be mailed to candidates approximately 6 weeks after the end of each testing period. May I receive more detailed information on my test results? If you do not pass the CMA exam parts 1, 2, and 3, you will automatically receive a Detail of Performance report. The report is provided at no additional charge and shows performance by topic for the exam part taken. This information is intended to help you identify subject matter areas where further study may be needed. In addition, an Advanced Exam Performance Report for parts 1, 2 and 3, which breaks the exam down to subtopics and follows the Content Specification Outlines, is available for a fee. How do individual multiple choice questions on the exam affect the score I receive? Are some questions weighted more heavily than others? Individual questions within the CMA parts 1, 2, and 3 are not weighted in the sense that one question is worth more points than another question. All questions are of equal point value. The individual questions do determine the relative difficulty of the entire set of questions, or “form,” of the exam. When you take an exam, a set of questions is randomly selected. Each question included in the set of questions has a “difficulty rating” that, together with all the other questions, determines the relative difficulty of that particular set of questions. This relative difficulty determines the number of questions that must be answered correctly in order to pass. A more difficult exam will require a lower number of correct answers to achieve a passing score than an easier exam. Should I guess if I’m not sure of the correct answer to a question? There is no penalty for incorrect answers. Therefore, in the CMA parts 1, 2, and 3, you should select an option that seems reasonable rather than leave an answer blank, particularly if you can eliminate one or two of the options as being incorrect. On part 4 partial credit is available, it is to your advantage to show all of your work.

EXAM TAKING STRATEGIES The best preparation you can make for taking the exam is thoroughly studying the material and content covered by the examination. Beyond that, however, there are several strategies you can use while taking the test that will help to maximize your performance.

1. Answer the questions that you know first. Try to avoid dwelling on any particular question(s) for extended periods of time. This will give you the opportunity to answer all of the questions you may know and also allow you to see how much time you have to devote to the questions that are more difficult for you. 2. Mark the difficult questions for later review. You should approach the test with the expectation that you will encounter at least some questions that you cannot immediately answer. Keep in mind that each question is worth the same number of points (i.e., 1 for correct and 0 for incorrect), regardless of its difficulty. Do not agonize over any particular question, but mark1 those questions you are unsure of so that you can readily locate them when you are ready to look at them a second time. 3. Read each question carefully, noting any key words. Pay close attention to the wording of the question. Words such as except, least, and most in a question will have a significant bearing on the correct answer. Think each question through very carefully before answering. You may want to jot down key words that appear in the question, or to rephrase the question in your own words if you are having trouble understanding it.

4. Try to answer the question in your mind before actually looking at the options. Then see if the answer you formulated exists among the options in the CMA parts 1, 2, and 3. Doing this could serve as a sort of verification of the correct answer. You should still carefully review the other options as well, to be certain there isn’t a more appropriate answer than the one you selected.

5. If you are uncertain about an answer, try to make an educated guess. You are likely to know something about the topic presented in the question and are, therefore, often able to eliminate at least one incorrect option in the CMA parts 1, 2, and 3. If you come across an item for which you truly do not know the answer, try to eliminate those options that you deem likely to be incorrect. This will increase your chances of selecting the correct answer.

1 The CMA exam delivery program has a provision for doing this.

6. Answer ALL of the questions. The CMA exams do not employ a penalty for incorrect answers. Points are not deducted from your score for an incorrect answer. There is nothing to gain by leaving questions unanswered; therefore, answer all questions on the exam. 7. Use the full time allotted to you. In a similar vein, there is no advantage in ending the test early. Make the most of any remaining time you may have by reviewing your work, making corrections, or going back to more difficult questions. It is possible that during such review time, you will recall some fact or information which you may have previously overlooked on one or more questions. Though it may seem like a relief to end the test early, bear in mind that the allotted time will end soon enough, and you will want to make the most of the few minutes you have remaining to you to help maximize your score.

Answer Changing One of the great myths about taking tests is that one should not change one’s answer on an objective examination, because the first answer is usually the right one. The admonition to stay with your original answer because your first instinct is likely to be correct is actually incorrect. Numerous studies of testing have shown that, on average, when candidates change their responses to a test question, about 55% of the time the change is made from a wrong answer to a right one, thereby resulting in an increased score. Another 23% of the time, examinees will change their responses from a wrong answer to another wrong answer, resulting in no change to their scores. Only about 20% of the time will candidates change from a right answer to a wrong answer. Therefore, if you have good reason to believe that a change to your answer is warranted, making such a change will more often than not lead to either an increase or at the very worst no change to your total score. The chances of negatively impacting your total score by making such changes are only likely to be one in five. Test Anxiety Test anxiety is natural and is likely to be experienced by most examinees to some degree. Some examinees are able to channel their anxiety in a positive way; others have more difficulty managing their anxiety. Test anxiety can result in mental distractions, mental blocks, and physical symptoms of anxiety that may affect your performance on the exam. You can reduce your anxiety by recognizing some of the factors that contribute to it. For instance, test anxious examinees often lose perspective on the situation by seeing the test as a final or one-time opportunity, which it rarely is; make an effort to remind yourself of this when taking the exam. If you draw a “blank” during the exam, do not panic, since such an occurrence is quite normal. Return to the question at a later time or take a few moments to relax until it comes back to you. Try to replace any self-defeating thoughts like “I haven’t studied enough” or “I don’t know the material” with more positive internal messages - the chances are you will know more about the material than you think. Finally, effective study and preparation is a strong, if not the strongest, approach for enhancing self-confidence and reducing nervousness. You should also take advantage of any available exam preparation materials and opportunities, and seek any guidance on ways to enhance your study skills.

EXAM SITES AND SAMPLE SCREEN LAYOUT Another possible source of anxiety is not knowing what to expect at the exam site. The ICMA uses Prometric to administer the exams. Prometric has an extensive network of U.S. and international testing centers. These Prometric Testing Centers (PTCs) are permanent computer-equipped testing facilities with testing hours available daily (except holidays and Sundays in certain locations) in the U.S. Internationally, testing times are set in accordance with local laws and customs. All U.S. PTCs are handicapped accessible and conform with the Americans with Disabilities Act (ADA). The PTCs offer private, modular testing booths with ample workspace, comfortable seating, proper lighting, and ventilation. The computer workstations employ state-of-the-art technology with high-clarity screen displays to minimize eye-strain. Candidates may use either a computer keyboard or a mouse to enter test answers. On request, candidates will be provided with scrap paper and pencils for use in making calculations. The scrap paper is counted by the test center personnel and all paper is collected at the end of the exam. Candidates are allowed to bring a small battery or solar powered electronic calculator with no more than 6 functions - addition, subtraction, multiplication, division, square root, and percent. The calculator must be non-programmable, must not use tape, and memory must erase when the calculator is turned off. Candidates are not permitted to bring personal belongings, such as purses, briefcases, and jackets, into the testing room. Small lockers are available at the test centers for storage of personal belongings. At the start of the test, you will be taken through a short tutorial that introduces the testing screens and shows you how to select answers and mark questions for review. The tutorial can be repeated if you wish; however, total tutorial time is limited to 15 minutes. Following the tutorial, the exam begins. The time remaining to complete the exam is displayed in the upper right corner of the screen. The tutorial does not affect the three hours allowed for the exam part being taken. A sample screen layout for the CMA parts 1, 2, and 3 is provided on the next page. This screen layout shows the time display; the next and previous selections, which take you to the next or previous page; the selection to mark a question for review; and the selection to review marked items.

EXAM STATISTICS The demographic profile of candidates in the CMA Program can be found on our website at www.imanet.org/pdf/1499.pdf. Candidates for the CMA Program come from a wide variety of academic and professional backgrounds, but when looking at the entire population, there are some general characteristics. The profiles present a statistical description of those individuals taking the tests over the last several years. The pass rate summary can be found on our website at www.imanet.org/pdf/PASS%20RATES%206-06.pdf. The pass rate summary shows how candidates have performed on the different parts of the exams. The historical pass rates are not necessarily indicative of what the pass rates will be in the future, but they do give you a sense of the rigor of the exam. To date, over 26,500 people have successfully completed the four parts of the CMA exam.

http://www.imanet.org/pdf/1499.pdf

http://www.imanet.org/pdf/PASS%20RATES%206-06.pdf

STUDY MATERIALS The material in the remainder of the resource guide is provided to assist you in achieving certification. This material must be supplemented with textbooks from the suggested reading list and/or review materials provided by many independent sources. The independent sources offer self-study review materials in several formats, including textbooks, audio tapes, and software. Many of these independent sources also offer live review classes. While the ICMA does not sponsor or promote any of the review materials or groups, many are listed on our website (www.imanet.org/certification_preparation_study_self.asp) to assist you in your study efforts. The material provided includes: • Suggested Reading List: A listing of selected textbooks containing appropriate study materials.

If you have a similar text that is not listed or an edition of a listed text that is a few years older, these should provide adequate study material. In other words, you do not necessarily need the latest editions nor exactly the same books.

• Topic/Resource Outline: For each major topic in the content specification, the ICMA has

provided several textbook references to guide your studies. The references should be considered alternatives (i.e., one is enough), and the order in which the textbooks are listed does not denote a preference for one book over another. It should be noted that the detailed content specification outline, along with the explicit Learning Outcome Statements can be found on our website (www.imanet.org/certification_preparation_content.asp).

• Ethical Standards: These are the IMA’s Statement of Ethical Professional Practice and resolution

of ethical conflict. All IMA members are required to abide by these standards. Questions on ethical standards will appear on part 4 of the exam.

• Time-Value of Money Tables: These are the same tables that you will have access to during your

exams. If you need to use these tables click the exhibit button on the bottom of the screen. • Sample Questions: These questions have been provided to help you gain a better understanding

of what the test is like. They do not cover the full range of subject matter and should be supplemented by other study materials.

http://www.imanet.org/certification_preparation_study_self.asp

http://www.imanet.org/certification_preparation_content.asp

SUGGESTED READING LIST Part 1 – Business Analysis Business Economics Lipsey, Richard G., and Courant, Paul N., Economics, 12th edition, Addison-Wesley, Boston, MA, 1999. McConnell, Campbell R., and Brue, Stanley L., Economics: Principles, Problems and Policies, 17th edition, Irwin/McGraw-Hill, New York, NY, 2008. Global Business Madura, Jeff, International Financial Management, abridged 8th edition, Thomson South-Western Publishing Co., Mason, OH 45040, 2007. Daniels, John D., Radebaugh, Lee H., and Sullivan, Daniel P., International Business: Environment and Operations, 11th edition, Prentice-Hall Inc., Upper Saddle River, NJ, 2007. Lipsey, Richard G., and Courant, Paul N., Economics, 12th edition, Addison-Wesley, Boston, MA, 1999. McConnell, Campbell R., and Brue, Stanley L., Economics: Principles, Problems and Policies, 17th edition, Irwin/McGraw-Hill, New York, NY, 2008. Internal Controls Sawyer, Lawrence B., Dittenhofer, Mortimer A., Scheiner, H. James H., Graham, Anne, Makosg, Paul, Sawyer’s Internal Auditing, 5th edition, The Institute of Internal Auditors, Altamonte Springs, FL, 2003. Moscove, Steven, Simpkin, Mark & Bagranoff, Nancy A., Core Concepts of Accounting Information Systems, 8th edition, John Wiley & Sons, Hoboken, NJ, 2002.

Bodnar, George H., Hopwood, William S. Accounting Information Systems, 9th edition, Prentice-Hall, Upper Saddle River, NJ, 2004. O’Brien, James A. & Marakas, George M., Introduction to Information Systems, 13th edition, Irwin/McGraw-Hill Publishers, Barr Ridge, IL, 2007.

Quantitative Methods Blocher, Edward, J., Chen, Kung, H., and Lin, Thomas W., Cost Management: A Strategic Emphasis, 3rd edition, Irwin/McGraw Hill, New York, NY 2004. Horngren, Charles T., Foster, George M., and Datar, Srikant, Cost Accounting: A Managerial Emphasis, 12th edition, Prentice-Hall Inc., Upper Saddle River, NJ, 2006. Anderson, David R., Sweeney, Dennis J., and Williams, Thomas A., Quantitative Methods for Business, 10th edition, Thomson South-Western Publishing Company, Mason, OH, 2006. Financial Statement Analysis Wild, John L., Subramanyam, K.R.; and Halsey, Robert F., Financial Statement Analysis, Theory, Application, and Interpretation, 9th edition, McGraw-Hill Book Co., New York, NY, 2007. White, Gerald I., Sondhi, Ashwinpaul C., Fried, Dov, The Analysis and Use of Financial Statements, 3rd edition, Wiley Textbooks, Hoboken, NJ, 2002. Kieso, Donald E., Weygandt, Jerry J., and Warfield, Terry D., Intermediate Accounting, 12th edition, Wiley & Sons, Hoboken, NJ, 2007.

Arens, Alvin A., Elders, Randal J., Beasley, Mark, Auditing and Assurance Services: An Integrated Approach, 9th edition, Prentice-Hall, Upper Saddle River, NJ, 2003.

Nikolai, Loren A., and Bazley, John D., Intermediate Accounting, 9th edition, South-Western Publishing Company, Boston, MA, 2007. Part 2 - Management Accounting and Reporting Budget Preparation Blocher, Edward J., Chen, Kung, H., and Lin, Thomas W., Cost Management: A Strategic Emphasis, 3rd edition, Irwin/McGraw Hill, New York, NY 2004. Horngren, Charles T., Foster, George, and Datar, Srikant M., Cost Accounting: A Managerial Emphasis, 12th edition, Prentice-Hall Inc., Upper Saddle River, NJ, 2006.

Cost Management Blocher, Edward J., Chen, Kung, H., and Lin, Thomas W., Cost Management: A Strategic Emphasis, 3rd edition, Irwin/McGraw Hill, New York, NY 2004. Horngren, Charles T., Foster, George, and Datar, Srikant M., Cost Accounting: A Managerial Emphasis, 12th edition, Prentice-Hall Inc., Upper Saddle River, NJ, 2006. Information Management Moscove, Stephen A., Simkin, Mark G., and Bagranoff, Nancy A., Core Concepts of Accounting Information Systems, 8th edition, John Wiley & Sons Inc., New York, NY, 2003. Bodnar, George H., Hopwood, William S., Accounting Information Systems, 9th edition, Prentice Hall-Latest Edition, Upper Saddle River, NJ, 2003. O’Brien, James A. & Marakas, George M. , Introduction to Information Systems, 13th edition, Irwin/McGraw-Hill Publishers, Barr Ridge, IL, 2007. Performance Management Blocher, Edward J., Chen, Kung, H., and Lin, Thomas W., Cost Management: A Strategic Emphasis, 3rd edition, Irwin/McGraw Hill, New York, NY 2004. Horngren, Charles T., Foster, George, and Datar, Srikant M., Cost Accounting: A Managerial Emphasis, 12th edition, Prentice-Hall Inc., Upper Saddle River, NJ, 2006. Evans, James R., Lindsay, William M., The Management and Control of Quality, 5th edition, South-Western, Cincinnati, OH, 2002. External Financial Reporting Kieso, Donald E., Weygandt, Jerry J., and Warfield, Terry D., Intermediate Accounting, 12th edition, John Wiley & Sons, New York, NY, 2007. Nikolai, Loren A., and Bazley, John D., Intermediate Accounting, 9th edition, South-Western Publishing Company, Boston, MA, 2007. Larsen, E. John, Modern Advanced Accounting, 9th edition, McGraw-Hill\Irwin Book Co., New York, NY, 2003.

Part 3 - Strategic Management Strategic Planning Hill, Charles W. L., Jones, Gareth R., Strategic Management, An Integrated Approach, Houghton Mifflin, Boston, MA, 2002. Thomas L. Wheelen and J. David Hunger, Strategic Management and Business Policy, 10th edition, Prentice Hall Inc., Upper Saddle River, NJ, 2006. Blocher, Edward J., Chen, Kung, H., and Lin, Thomas W., Cost Management: A Strategic Emphasis, 3rd edition, Irwin/McGraw Hill, New York, NY 2004. Horngren, Charles T., Foster, George, and Datar, Srikant M., Cost Accounting: A Managerial Emphasis, 12th edition, Prentice-Hall Inc., Upper Saddle River, NJ, 2006. Strategic Marketing Armstrong, Gary, Kotler, Philip, Marketing, an Introduction, 6th edition, Prentice Hall Inc., Upper Saddle River, NJ, 2003. Kotler, Philip, Marketing Management, 12th edition, Prentice Hall Inc., Upper Saddle River, NJ 2006. Corporate Finance Brealey, Richard A., and Myers, Stewart C. and Allen, Franklin, Principles of Corporate Finance, 8th edition, McGraw-Hill Inc., New York, NY, 2006. Van Horne, James C., and Wachowicz, John M., Jr., Fundamentals of Financial Management, 12th edition, Prentice-Hall Inc., Upper Saddle River, NJ, 2005. Decision Analysis Blocher, Edward, J., Chen, Kung, H., and Lin, Thomas W., Cost Management: A Strategic Emphasis, 3rd edition, Irwin/McGraw Hill, New York, NY 2004. Horngren, Charles T., Foster, George M., and Datar, Srikant, Cost Accounting: A Managerial Emphasis, 12th edition, Prentice-Hall Inc., Upper Saddle River, NJ, 2007.

Investment Decisions Blocher, Edward, J., Chen, Kung, H., and Lin, Thomas W., Cost Management: A Strategic Emphasis, 3rd edition, Irwin/McGraw Hill, New York, NY 2004. Horngren, Charles T., Foster, George M., and Datar, Srikant, Cost Accounting: A Managerial Emphasis, 12th edition, Prentice-Hall Inc., Upper Saddle River, NJ, 2006. Brealey, Richard A., and Myers, Stewart C. and Allen, Franklin, Principles of Corporate Finance, 8th edition, McGraw-Hill Inc., New York, NY, 2006. Van Horne, James C., and Wachowicz, John M., Jr., Fundamentals of Financial Management, 12th edition, Prentice-Hall Inc., Upper Saddle River, NJ, 2005. Part 4 – Business Applications See suggested reading list for CMA exam Parts 1, 2, and 3 above. Also, consult the following. Organization Management Moorhead, Gregory, and Griffin, Ricky W., Organizational Behavior: Managing People and Organizations, 8th edition, Houghton Mifflin Company, Boston, MA, 2007. Robbins, Stephen P., Organizational Behavior, 10th edition, Prentice-Hall, Upper Saddle River, NJ, 2002. Organization Communication Moorhead, Griffin, Ricky W. and Gregory, Organizational Behavior: Managing People and Organizations, 8th edition, Houghton Mifflin Company, Boston, MA, 2007. Robbins, Stephen P., Organizational Behavior, 10th edition, Prentice-Hall, Upper Saddle River, NJ, 2002. Behavioral Issues Blocher, Edward, J., Chen, Kung, H., and Lin, Thomas W., Cost Management: A Strategic Emphasis, 3rd edition, Irwin/McGraw Hill, New York, NY 2004. Horngren, Charles T., Foster, George M., and Datar, Srikant, Cost Accounting: A Managerial Emphasis, 12th edition, Prentice-Hall Inc., Upper Saddle River, NJ, 2006. Ethical Considerations IMA’s “Statement of Ethical Professional Practice”

TOPIC/RESOURCE OUTLINE

Part 1: Business Analysis A. Business Economics (25% - Level B) 1. Factors affecting individual firms Lipsey, Chapters 4-6, 18 McConnell, Chapters 3, 18 2. Consumption of goods Lipsey, Chapter 7 McConnell, Chapter 19 3. Production cost functions Lipsey, Chapters 8, 9 McConnell, Chapter 20 4. Market structures and pricing Lipsey, Chapters 10-12 McConnell, Chapters 21-23 5. The economy as system of markets Lipsey, Chapters 15-17 McConnell, Chapters 25-27 6. Issues in Macroeconomics Lipsey, Chapters 30-33 McConnell, Chapters 15-17 7. Domestic Output, National Income, Lipsey, Chapters 22-26 and price levels McConnell, Chapters 6, 10 8. Business cycles Lipsey, Chapters 21, 26 McConnell, Chapters 7, 11 9. Fiscal policy Lipsey, Chapters 24, 26, 32 McConnell, Chapters 9, 11 10. Money and monetary policy Lipsey, Chapters 27-29 McConnell, Chapters 12-14 B. Global Business (20%) (Level B) 1. Global trade Lipsey, Chapters 35, 36 McConnell, Chapters 5, 35 Daniels, Chapters 5, 6

2. Foreign exchange Lipsey, Chapter 37 Madura, Chapters 2, 4, 6 McConnell, Chapters 5, 36 Daniels, Chapter 10 3. Other global topics Madura, Chapters 2, 13, 14 Lipsey, Chapter 14 Daniels, Chapters 8, 10, 11, 18, 19 C. Internal Controls (15%) (Level A) 1. Risk assessment and controls Sawyer, Chapters 2-3 Moscove, Chapter 9 Bodnar, Chapters 5, 6 2. Internal auditing Sawyer, Chapter 1 3. Systems controls and security measures Sawyer, Chapters 13-15 O’Brien, Chapter 11 Moscove, Chapters 3, 10-11 Bodnar, Chapters 5, 6, and 16 D. Quantitative Methods (15%) (Level B) 1. Forecasting analysis Anderson, Chapter 6 Blocher, Chapter 7

Horngren, Chapter 10 2. Linear programming Anderson, Chapter 7 Blocher, Chapter 10 (Appendix) Horngren, Chapter 11 (Appendix) 4. Network analysis Anderson, Chapter 12 5. Probability concepts Anderson, Chapters 2, 3, 5 Horngren, Chapter 3 (Appendix) 6. Decision tree analysis Anderson, Chapter 4 7. Other quantitative techniques Anderson, Chapters 4, 16

Blocher, Chapter 8 Horngren, Chapters 3, 6, 11, 21

E. Financial Statement Analysis (25%) (Level B) 1. Development of accounting standards Kieso, Chapter 1 White, Chapter 1 2. Financial statement assurance Arens, Chapters 1, 3, 6, 7, 24, 25 Kieso, Chapter 25 Nikolai, Chapter 5 White, Chapter 1 3. Short-term liquidity Wild, Chapter 10 White, Chapters 4, 6, 10 4. Capital structure and solvency Wild, Chapter 10 White, Chapters 4, 7, 10 5. Return on invested capital Wild, Chapter 8 White, Chapter 4 6. Profitability analysis Wild, Chapter 8 White, Chapter 4 7. Earnings-based analysis Wild, Chapters 10, 11 White, Chapter 4 8. Other analytical issues Wild, Chapters 1-5 White, Chapters 1, 15

Part 2: Management Accounting and Reporting A. Budget Preparation (15%) (Level C) 1. Budgeting concepts Blocher, Chapter 8

Horngren, Chapter 6 2. Budget systems Blocher, Chapter 8

Horngren, Chapters 6-8 3. Annual profit plan and supporting Blocher, Chapter 9 schedules Horngren, Chapters 6-8 B. Cost Management (25%) (Level C) 1. Terminology Blocher, Chapter 3

Horngren, Chapter 2 2. Measurement concepts Blocher Chapters 3, 12, 14, 18

Horngren, Chapters 2, 4, 9, 10, 16 3. Accumulation systems Blocher, Chapters 4, 12, 13

Horngren, Chapters 4, 5, 17, 20 4. Overhead costs Horngren, Chapters 4, 5, 8, 14, 15 C. Information Management (15%) (Level A) 1. Nature and purpose of an information Moscove, Chapters 1, 4, 5 system O’Brien, Chapter 1 Bodnar, Chapters 1, 4, 10 2. Systems development and design Moscove, Chapters 13-15 O’Brien, Chapter 10 Bodnar, Chapters 11-13 3. Technology of information systems Moscove, Chapters 7-8 O’Brien, Chapters 3-6, 9 Bodnar, Chapters 1, 3, 14, 15 4. Electronic commerce Moscove, Chapter 2 O’Brien, Chapters 7, 8 Bodnar, Chapter 3

5. Integrated enterprise-wide data model Moscove, Chapters 6 O’Brien, Chapter 9 Bodnar, Chapter 1 D. Performance Measurement (20%) (Level C) 1. Cost and variance measures Blocher, Chapters 9, 15, 16, 17, 18 Horngren, Chapters 7, 8, 19, 22, 23 2. Responsibility centers and Blocher, Chapters 18, 19

reporting segments Horngren, Chapters 3, 7, 8, 14, 15, 22, 23 3. Financial measures Blocher, Chapters 18, 19 Horngren, Chapters 13, 23 4. Balanced Scorecard Evans, Chapter 8 Horngren, Chapter 13 Blocher, Chapter 18 5. Quality considerations Blocher, Chapter 6 Horngren, Chapters 18, 19 Evans, Chapters 1, 7, 8, 10-12, 14 E. External Financial Reporting (25%) (Level B) 1. Objectives of external financial Kieso, Chapters 1, 4, 5, 24 reporting Nikolai, Chapters 2, 3, 4, 21 2. Financial accounting fundamentals Kieso, Chapters 1, 2 Nikolai, Chapters 1, 2 3. Financial statements and statement users Kieso, Chapters 1, 2, 4, 5, 24 Nikolai, Chapters 1, 2, 3, 4, 21 4. Recognition, measurement, Kieso, Chapters 4, 7-23 valuation, and disclosure Nikolai, Chapters 4, 6-18, 20, 22 Larsen, Chapters 11, 12, 13

5. The SEC and its reporting requirements Kieso, Chapter 1

Larsen, Chapter 13 Nikolai, Chapter 5 6. The annual report Kieso, Chapter 24 Nikolai, Chapter 5 Part 3: Strategic Management A. Strategic Planning (15%)(Level B) 1. Strategic and tactical planning Hill, Chapters 1-6 Wheelen, Chapters 1, 3-7 Blocher, Chapters 2, 9 Horngren, Chapter 13 2. Manufacturing paradigms Blocher, Chapters 9, 15, 16, 17, 18

Horngren, Chapters 7, 8, 19, 22, 23

3. Business process performance Blocher, Chapters 9, 15, 16, 17, 18 Horngren, Chapters 7, 8, 19, 22, 23 B. Strategic Marketing (15% - Level A) 1. Strategic role within the firm Armstrong, Chapter 2 Kotler, Chapter 1 2. Managing marketing information Armstrong, Chapter 5 Kotler, Chapter 4 3. Market segmentation, targeting, and Armstrong, Chapter 7 positioning Kotler, Chapters 8-10 4. Managing products and services Armstrong, Chapters 8-9 Kotler, Chapters 12-13 5. Pricing strategy Armstrong, Chapter 10 Kotler, Chapter 14 6. Promotional mix and distribution strategy Armstrong, Chapters 11-14 Kotler, Chapters 15-18

C. Corporate Finance (25%) (Level B) 1. Risk and return Brealey, Chapters 7, 8 Van Horne, Chapter 5 2. Financial instruments Brealey, Chapters 14, 23-26 Van Horne, Chapters 20-22 3. Cost of capital Brealey, Chapter 19 Van Horne, Chapter 15 4. Managing current assets Brealey, Chapters 30-31 Van Horne, Chapters 8-10 5. Financing current assets Brealey, Chapter 31 Van Horne, Chapter 11 D. Decision Analysis (25%) (Level C) 1. Decision process Blocher, Chapter 9 Horngren, Chapter 11 2. Relevant data concepts Blocher, Chapter 9 Horngren, Chapter 11 3. Cost/volume/profit analysis Blocher, Chapter 7 Horngren, Chapter 3 4. Marginal analysis Blocher, Chapter 9 Horngren, Chapters 11, 12 5. Cost-based pricing Blocher, Chapter 10 Horngren, Chapter 12 E. Investment Decisions (20%) (Level C) 1. Capital budgeting process Blocher, Chapter 20

Brealey, Chapters 5, 6 Horngren, Chapter 21

Van Horne, Chapters 12, 13 2. Discounted cash flow analysis Blocher, Chapter 20

Brealey, Chapter 5 Horngren, Chapter 21

Van Horne, Chapter 13

3. Payback and discounted payback Blocher, Chapter 20

Brealey, Chapter 5 Horngren, Chapter 21 4. Ranking investment projects Blocher, Chapter

20 Brealey, Chapter 5

Horngren, Chapter 21 Van Horne, Chapter 13 5. Risk analysis in capital investment Brealey,

Chapter 9 Van Horne, Chapter 14 6. Real options in capital investments Brealey, Chapter 10 Van Horne, Chapter 14 Part 4: Business Applications In addition to the topics and resources outlined in the content specifications for the CMA exam Parts 1, 2 and 3, the Part 4 examination will include the topics listed below. There will be at least one question that will be devoted to an ethical situation presented in a business-oriented context. Additional Part 4 Topics: 1. Organization management Moorhead, Chapters 3, 7, 11, 12, 15-17, 19

Robbins, Chapters 5, 8, 9, 12, 14, 15, 17, 18

2. Organization communication Moorhead, Chapters 5, 6, 10 Robbins, Chapters 6, 7, 10, 13

3. Behavioral issues Horngren, Chapters 6, 22, 23 Blocher, Chapters 8, 17-19

4. Ethical considerations IMA’s “Statement of Ethical Professional Practice”

IMA STATEMENT OF ETHICAL PROFESSIONAL PRACTICE Members of IMA shall behave ethically. A commitment to ethical professional practice includes: overarching principles that express our values, and standards that guide our conduct.

PRINCIPLES IMA’s overarching ethical principles include: Honesty, Fairness, Objectivity, and Responsibility. Members shall act in accordance with these principles and shall encourage others within their organizations to adhere to them.

STANDARDS

A member’s failure to comply with the following standards may result in disciplinary action. I. COMPETENCE Each member has a responsibility to: 1. Maintain an appropriate level of professional expertise by continually developing knowledge and skills. 2. Perform professional duties in accordance with relevant laws, regulations, and technical standards. 3. Provide decision support information and recommendations that are accurate, clear, concise, and timely. 4. Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity. II. CONFIDENTIALITY Each member has a responsibility to: 1. Keep information confidential except when disclosure is authorized or legally required. 2. Inform all relevant parties regarding appropriate use of confidential information. Monitor subordinates’ activities to ensure compliance. 3. Refrain from using confidential information for unethical or illegal advantage. III. INTEGRITY Each member has a responsibility to: 1. Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts. 2. Refrain from engaging in any conduct that would prejudice carrying out duties ethically. 3. Abstain from engaging in or supporting any activity that might discredit the profession.

IV. CREDIBILITY Each member has a responsibility to: 1. Communicate information fairly and objectively. 2. Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations. 3. Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law.

RESOLUTION OF ETHICAL CONFLICT In applying the Standards of Ethical Professional Practice, you may encounter problems identifying unethical behavior or resolving an ethical conflict. When faced with ethical issues, you should follow your organization’s established policies on the resolution of such conflict. If these policies do not resolve the ethical conflict, you should consider the following courses of action:

1. Discuss the issue with your immediate supervisor except when it appears that the supervisor is involved. In that case, present the issue to the next level. If you cannot achieve a satisfactory resolution, submit the issue to the next management level. If your immediate superior is the chief executive officer or equivalent, the acceptable reviewing authority may be a group such as the audit committee, executive committee, board of directors, board of trustees, or owners. Contact with levels above the immediate superior should be initiated only with your superior’s knowledge, assuming he or she is not involved. Communication of such problems to authorities or individuals not employed or engaged by the organization is not considered appropriate, unless you believe there is a clear violation of the law.

2. Clarify relevant ethical issues by initiating a confidential discussion with an IMA Ethics Counselor or other impartial advisor to obtain a better understanding of possible courses of action.

3. Consult your own attorney as to legal obligations and rights concerning the ethical conflict.

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SAMPLE QUESTIONS - PART 1

Section A. Business Economics 1. In the long run, a firm may experience increasing returns due to

a. the principle of substitution. b. opportunity costs.

c. comparative advantage. d. economies of scale.

Key = d

2. If the price of computers increases and total revenue of the firm increases, then the demand for computers is

a. inelastic and the elasticity of demand is greater than one. b. inelastic and the elasticity of demand is less than one. c. elastic and the elasticity of demand is greater than one d. elastic and the elasticity of demand is less than one. Key = b

3. Which one of the following most accurately describes the market conditions normally associated with monopolistic competition?

a. High barriers to entry; homogenous products; many independent firms. b. Few independent firms; high barriers to entry; differentiated products. c. Low barriers to entry; homogenous products; many independent firms. d. Differentiated products; many independent firms; low barriers to entry.

Key = d

4. The trough of a business cycle is generally characterized by which one of the following?

a. Shortages of essential raw materials. b. Increasing capital investments. c. Increasing price level. d. Unused productive capacity.

Key = d

5. Information related to the financial transactions for a country is given below with values stated

in billions of US$. Gross domestic product (GDP) $4,000 Transfer payments 500 Corporate income taxes 50 Social Security contributions 200 Indirect business taxes 210 Personal taxes 250 Undistributed corporate profits 25 Depreciation 500 Net income earned abroad 0 What is Net Domestic Product?

a. $3,500. b. $3,450. c. $3,475. d. $4,500. Key = a Solution: GDP less Depreciation = $4,000 - $500

Section B. Global Business 6. A U.S. company currently has domestic operations only. It is considering an equal-size

investment in either Canada or Britain. The data on expected rate of return and the risk associated with each of these proposed investments are given below.

Proposed Investment Mean Return Standard Deviation British Investment 22% 10% Canadian Investment 28% 15% The mean return on the company’s current, domestic only, business is 20% with a standard deviation of 15%. Using the above data and the correlation coefficients, the company calculated the following portfolio risk and return (based on a ratio of 50% U.S. domestic operations and 50% international operations).

Investments Mean Return

Standard Deviation U.S. and Britain 21%

3%

U.S. and Canada 24% 15%

The company plans to select the optimal combination of countries based on risk and return for the domestic and international investments taken together. Because the company is new to the international business environment, it is relatively risk averse. Based on the above data, which one of the following alternatives provides the best risk adjusted return to the firm? a. The British investment. b. The Canadian investment. c. Neither investment. d. Unable to determine based on data given.

Key = a Solution: Expanding the investment into Britain would increase the return from 20% to 21% and, at the same time, reduce risk measured by the standard deviation from 15% to 3%. This will give a better return per unit of risk whereas the investment in Canadian operations would increase the return from 20% to 24% without any reduction in risk (standard deviation of 15%).

7. Which one of the following statements in regard to tariffs is correct?

a. A tariff reduces foreign demand but increases domestic demand. b. A tariff reduces both domestic demand and supply. c. A tariff increases the price of domestic and imported products d. A tariff reduces the price of domestic products and increases domestic supply.

Key = c

8. The Baker Company, a U.S. corporation headquartered in California, has a manufacturing

affiliate in Mexico. Baker wants to expand the capability of this plant. The plant is very profitable and generates a substantial positive cash flow. Approximately $1,000,000 (U.S.) is available to be paid in dividends to the U.S. parent from the Mexican affiliate. In addition, another affiliate, located in Brazil, has $750,000 (U.S.) available to be paid in dividends.

Which one of the following would be the best way to finance a $500,000 investment in the

Mexican facility?

a. Have the parent transfer funds for the $500,000 investment. b. Have Brazil transfer the $500,000. c. Have the parent transfer $250,000, and Brazil transfer $250,000. d. Have the Mexican facility reduce its dividends to the U.S. parent by the $500,000. Key = d

Section C. Internal Controls 9. An accounting system identification code that utilizes a sum-of-digits check digit will detect all

of the following errors except

a. completeness errors. b. transcription errors. c. transposition errors. d. validity errors.

Key = c

10. Which one of the following statements concerning concurrent auditing techniques is not correct?

a. They allow monitoring a system on a continuous basis for fraudulent transactions. b. They are most useful in complex on-line systems where audit trails have either become

diminished or are very limited. c. They allow faster detection of unauthorized transactions. d. They are standard components of generic software packages.

Key = d

Section D. Quantitative Methods 11. The table below shows the estimated probabilities of the percent of defective units resulting from

a production run. Percent Defective Probability 2% 30% 3% 50% 4% 20%

The expected percent defective for a production run would be a. 1.50%. b. 2.30%. c. 2.90%. d. 3.00%.

Key = c

Solution: Sum of the percent defective multiplied by its probability of occurrence (2% x .30) + (3% x .50) + (4% x .20) = .60 + 1.50 + .80 = 2.90% 12. When simulating with the Monte Carlo technique, the average simulated demand over the long

run should approximate the

a. actual demand. b. real demand. c. sampled demand. d. expected demand. Key = d

13. Hanson Company manufactures two different types of receivers, a regular Model R and a special features Model S. The company has limited resources. On an annual basis it has a total of 480 direct labor-hours and a total of 300 lbs. of material available for use in the manufacture of these receivers. The company uses linear programming to determine a production schedule that will maximize the company’s profit.

Based on the company’s current data on selling prices and production costs, it is estimated that the sale of Model R will contribute $7 profit per unit and the sale of Model S will contribute $10 profit per unit. Resources used in the production of the two receivers are as follows. (Let Model S = S and Model R = R.)

Model S Model R

Raw materials used per unit 5 lbs. 3 lbs. Labor used per unit 6 hours 4 hours

The constraint function for labor hours can be expressed as

a. 5S + 3R < = 300. b. 6S – 4R < = 480. c. 6S + 4R < = 480. d. 11S + 7R < = 480. Key = c Solution: Total available hours = 480; require 6 hrs. for Model S and 4 hours for Model R

14. Reeves Inc. has developed a new production process to manufacture its product. The new

process is complex and requires a high degree of technical skill. However, management believes there is a good opportunity for the employees to improve as they become more familiar with the production process. The production of the first unit requires 100 direct labor hours. If a 70% learning curve is used, the cumulative direct labor hours required to produce a total of eight units would be

a. 196 hours. b. 274 hours. c. 392 hours. d. 560 hours. Key = b Solution: 100 x .7 x .7 x.7 = 34.3 average hours for 8 units; total hours = 8 x 34.3 = 274.4 hours

Section E. Financial Statement Analysis 15. Preparation of common-size financial statements is also referred to as

a. vertical analysis. b. horizontal analysis. c. liquidity analysis. d. activity analysis.

Key = a

16. Appalachian Outfitters Inc., a mail order supplier of camping gear, is putting together its current

year Statement of Cash Flows. A comparison of the company’s year-end balance sheet to the prior year’s balance sheet shows the following changes from a year ago.

Assets Liabilities & Net Worth

Cash & Marketable Securities $ (600) Accounts Payable $ 250 Accounts Receivable 200 Accruals 50 Inventories (100) Long-term Note (300) Gross Fixed Assets 3,600 Long-term Debt 1,400 Accumulated Depreciation 500 Common Stock 0 _____ Retained Earnings 2,200

Total $3,600 Total $3,600

The firm’s payout ratio is 20%. During the current year, net cash provided by operations is

a. $2,900. b. $3,050. c. $3,450. d. $4,050. Key = c

Solution: Net Profit after Taxes = Δ Retained Earnings ÷ (1 - Payout Ratio) = $2,200/.8 = $2,750. The operating cash flow section of the statement is then constructed as follows. Net Profit after Taxes $2,750 Depreciation Charges 500 Increase in Accounts Receivable (200) Decrease in Inventories 100 Increase in Accounts Payable 250 Increase in Accruals 50 Net Cash Provided by Operating Activities

$3,450

17. Selected financial information from Ferguson Inc.’s financial statements is shown below.

Statement of Financial Position ($000’s)

Current Year Prior Year Total current assets 740 590 Total long-term assets 960 1,045 Total assets $1,700 $1,635 Total current liabilities 315 285 Total long-term liabilities 94 80 Shareholders’ equity 1,291 1,270 Total liabilities and equity $1,700 $1,635

Income Statement ($000’s)

Net Sales $1,646 Cost of goods sold 782 Gross profit 864 Operating expenses 698 Operating income 166 Interest expense 10 Income taxes 55 Net income $ 101 Ferguson Inc.’s asset turnover for the current year is

a. .06 times. b. .47 times. c. .99 times. d. 1.94 times. Key = c Solution: Net sales/Average total assets [1,646/(1700+1635)/2]

18. An analyst uses the Statement of Financial Position as the primary source for all of the following

except

a. determining measures for controlling solvency. b. analyzing the potential cost of new financing. c. estimating the firm’s value as a going concern. d. identifying the firm’s capital structure. Key = c

19. Norton Inc. has a 2 to 1 current ratio. This ratio would increase to more than 2 to 1 if

a. a previously declared stock dividend were distributed. b. the company wrote off an uncollectible receivable. c. the company sold merchandise on open account that earned a normal gross margin. d. the company purchased inventory on open account. Key = c

SAMPLE QUESTIONS - PART 2 Section A. Budget Preparation 1. Trumbull Company budgeted sales on account of $120,000 for July, $211,000 for August, and

$198,000 for September. Collection experience indicates that 60% of the budgeted sales will be collected the month after the sale, 36% the second month, and 4% will be uncollectible. The cash from accounts receivable that should be budgeted for September would be

a. $169,800. b. $194,760. c. $197,880. d. $198,600.

Key = a

Solution: • July’s collections in September + August’s collections in September. • The balance of July’s sales is uncollectible. 36% x $120,000 = $ 43,200 July sales on account collected in September 60% x $211,000 = 126,600 August sales on account collected in September

$169,800 2. In an organization that plans by using comprehensive budgeting, the master budget refers to

a. a compilation of all the separate operational and financial budget schedules of the organization.

b. the booklet containing budget guidelines, policies, and forms to use in the budgeting process. c. the current budget updated for operations for part of the current year. d. a budget of a not-for-profit organization after it is approved by the appropriate authoritative

body.

Key = a

3. Which one of the following types of budget systems most strongly supports the objective of improving communication and promoting coordination?

a. Bottom up, flexible budgets. b. Bottom up, fixed budgets. c. Top down, flexible budgets. d. Top down, fixed budgets. Key = a

4. Which one of the following planning techniques is most likely to be used to determine which business units will receive additional capital and which will be divested?

a. Competitive analysis. b. Portfolio matrix analysis. c. Scenario development. d. Situational analysis.

Key = b

5. Werner Company buys raw materials from several suppliers, and makes payments according to the following schedule.

In the month of purchase 25% In the month after purchase 60% In the second month after purchase 15%

In preparing the master budget for the fourth quarter of the year, Werner assumed that total purchases for the quarter would be spread evenly over the three months. In its pro forma balance sheet, Werner anticipated a December 31 account payable balance of $207,000. What amount of purchase did Werner anticipate for the fourth quarter of the year?

a. $496,800. b. $558,900. c. $621,000. d. $690,000. Key = d Solution: Accounts payable at 12/31 = 75% of December and 15% of November $207,000/.90 = $230,000 for month; $690,000 for the quarter

6. Kaizen budgeting primarily refers to a process that

a. is used when an activity-based costing system is implemented. b. uses flexible budgeting. c. is used with just-in-time inventory management. d. includes continuous improvement to achieve the budget amounts. Key = d

Section B. Cost Management 7. Coach Corporation is considering which capacity measure is appropriate to use as the

denominator level of activity when applying fixed factory overhead to units produced. Assume that Coach selects direct labor hours as the cost driver and the following additional data are available from the prior year.

Hours Standard direct labor hours for normal capacity 200,000 Standard direct labor hours allowed for units produced in the prior year 210,000 Standard direct labor hours for the master budget capacity 220,000

Which of the following capacity measures for the denominator-level of activity would have resulted in an unfavorable volume variance?

a. Both normal capacity and master budget capacity. b. Neither normal capacity nor master budget capacity. c. Normal capacity only. d. Master budget capacity only.

Key = d

8. Assuming that there is a constant contribution margin per unit, the change in period-to-period operating income when using variable costing can be explained by the change in the

a. unit sales level multiplied by the unit sales price. b. finished goods inventory level multiplied by the unit sales price. c. unit sales level multiplied by the unit contribution margin. d. finished goods inventory level multiplied by the unit contribution margin.

Key = c

9. Consider the following information for Richardson Company for the prior year.

• The company produced 1,000 units and sold 900 units, both as budgeted. • There were no beginning or ending work-in-process inventories and no beginning finished

goods inventory. • Budgeted and actual fixed costs were equal; all variable manufacturing costs are affected by

production volume only; and all variable selling costs are affected by sales volume only. • Budgeted per unit revenues and costs were as follows.

Per Unit Sales price

$100 Direct materials

30 Direct labor

20 Other variable manufacturing costs

10 Fixed selling costs

5 Variable selling costs

12 Fixed selling costs ($33,600 total)

4 Fixed administrative costs ($1,800 total)

2

The contribution margin earned by Richardson for the prior year was

a. $25,200. b. $28,000. c. $31,500. d. $35,000.

Key = a

Solution: Sales price less direct and variable costs x number of units sold = contribution margin ($100 - ($30 + $20 + $10 +$12)) x 900 units = $25,200

10. Juniper Manufacturing uses a weighted-average process costing system at its satellite plant.

Goods pass from the Major Assembly Department to the Finishing Department to finished goods inventory. The goods are inspected twice in the Finishing Department. The first inspection occurs when the goods are 30% complete, and the second inspection occurs at the end of production. The following data pertain to the Finishing Department for the month of July.

Units Good units started and completed during July

65,000 Normal spoilage - first inspection

2,000 Abnormal spoilage - second inspection

150 Ending work-in-process inventory, 60% complete

15,000

There was no beginning work-in-process inventory in July. Juniper recognizes spoiled units to make the cost of all spoilage visible in their management reporting. Equivalent units for assigning costs for July would total

a. 74,000. b. 74,150. c. 74,600. d. 74,750.

Key = d

Solution: Physical Units Equivalent Units Started and completed during month (100%) 65,000 65,000 Normal spoilage (30%) 2,000 600 Abnormal spoilage (100%) 150 150 Ending work-in-process inventory (60%) 15,000 9,000 82,150 74,750

11. Pane Company uses a job costing system and applies overhead to products on the basis of direct

labor cost. Job No. 75, the only job in process on January 1, had the following costs assigned as of that date: direct materials, $40,000; direct labor, $80,000; and factory overhead, $120,000. The following selected costs were incurred during the year.

Traceable to jobs: Direct materials $178,000 Direct labor 345,000 $523,000

Not traceable to jobs: Factory materials and supplies 46,000 Indirect labor 235,000 Plant maintenance 73,000 Depreciation on factory equipment 29,000 Other factory costs 76,000 459,000

Pane’s profit plan for the year included budgeted direct labor of $320,000 and factory overhead of $448,000. There was no work-in-process on December 31. Pane’s overhead for the year was a. $11,000 overapplied. b. $24,000 overapplied. c. $11,000 underapplied. d. $24,000 underapplied.

Key = b

Solution: Applied overhead - actual = amount over/underapplied $448,000/$320,000 = budgeted application rate of 1.4 $345,000 direct labor actual x 1.4 = $483,000 applied $483,000 applied - $459,000 total not traceable = $24,000 overapplied 12. When compared with normal spoilage, abnormal spoilage

a. arises more frequently from factors that are inherent in the manufacturing process. b. is given the same accounting treatment as normal spoilage. c. is generally thought to be more controllable by production management than normal

spoilage. d. is not typically influenced by the “tightness” of production standards. Key = c

13. In allocating support department costs to operating departments, the allocation method that best accounts for interdepartmental relationships between support departments is the

a. reciprocal method. b. direct method. c. step method. d. physical volume method.

Key = a

14. Tucariz Company processes Duo into two joints products, Big and Mini. Duo is purchased in 1,000-gallon drums for $2,000. Processing costs are $3,000 to process the 1,000 gallons of Duo into 800 gallons of Big and 200 gallons of Mini. The selling price is $9 per gallon for Big and $4 per gallon for Mini. If the physical measure method is used to allocate joint costs to the final products, the total cost assigned to produce Mini is

a. $500. b. $1,000. c. $4,000. d. $4,500. Key = b Solution: ($3,000 + $2,000) x 200/1,000 = $1,000

Section C. Information Management 15. In data modeling and database design, the nature and extent of a relationship between two

entities is known as the

a. domain. b. subschema. c. cardinality. d. referential path.

Key = c

16. In an information system environment, many organizations combine key data processing cycles

related to accounting and finance. Traditionally, these cycles are

a. cash receipts, cash disbursements and capital budgeting. b. capital budgeting, budget reporting, and financial reporting. c. cash receipts and cash disbursements. d. cash receipts, cash disbursements, capital budgeting, and financial reporting.

Key = d

17. An online real-time system differs from a batch processing system in a number of ways. Which one of the following statements in regard to these two different types of processing systems is not correct?

a. An online real-time processing system is more useful for decision-making purposes than a

batch processing system. b. Online real-time processing updates the master file as each transaction occurs whereas batch

processing updates the master file periodically during scheduled computer runs. c. Batch processing requires the transaction file to be in sequential order, whereas online real-

time processing does not. d. A traditional payroll processing system is an example of online real-time processing, and an

airline reservation system is an example of batch processing. Key = d

Section D. Performance Measurement 18. The cost of scrap, rework, and tooling changes in a product quality cost system is categorized as

a(n)

a. external failure cost. b. internal failure cost. c. prevention cost. d. appraisal cost.

Key = b

19. Garland Company uses a standard cost system. The standard for each finished unit of product

allows for 3 pounds of plastic at $0.72 per pound. During December, Garland bought 4,500 pounds of plastic at $0.75 per pound, and used 4,100 pounds in the production of 1,300 finished units of product. What is the material purchase price variance for the month of December?

a. $117 unfavorable. b. $123 unfavorable. c. $135 unfavorable. d. $150 unfavorable.

Key = c Solution: (Standard price-actual price) x number of pounds purchased ($0.72 - $0.75) x 4,500 pounds = $135 unfavorable

20. To meet Zylon Corporation’s overall objectives, the Frame Division has just initiated a program

to increase sales by improving the manufacturing quality of its products. The most appropriate management level to be responsible for this program is the a. sales manager. b. production manager. c. division president. d. receiving and inspection manager.

Key = b

21. Which one of the following best describes the performance elements contained in most balanced

scorecards? Financial Nonfinancial Performance Measures Performance Measures a. No No. b. No Yes. c. Yes No. d. Yes Yes. Key = d

22. The JoyT Company manufactures Maxi Dolls for sale in toy stores. In planning for this year,

JoyT estimated variable factory overheard of $600,000 and fixed factory overheard of $400,000. JoyT uses a standard costing system, and factory overhead is allocated to units produced on the basis of standard direct labor hours. The denominator level of activity budgeted for this year was 10,000 direct labor hours, and JoyT used 10,300 actual direct labor hours.

Based on the output accomplished during the year, 9,900 standard direct labor hours should have been used. Actual variable factory overhead was $596,000, and actual fixed factory overhead was $410,000 for the year. Based on this information, the volume variance for JoyT for this year is

a. $4,000 unfavorable. b. $6,000 unfavorable. c. $10,000 unfavorable. d. $16,000 unfavorable.

Key = a

Solution:

(10,000 hrs. – 9900 hrs.) x (400,000/10,000)

Section E. External Financial Reporting 23. According to Statement of Financial Accounting Concepts No. 5, “Recognition and

Measurement in Financial Statements of Business Enterprises,” for an event to be recognized in the financial statements, it must be

a. relevant, reliable, and measurable. b. relevant, reliable, and useful. c. reliable, useful and measurable. d. useful, timely, and predictive. Key = a

24. The practice of the Securities and Exchange Commission (SEC) in regard to financial accounting

for public companies has generally been to

a. make rules and regulations regarding filings with the SEC but not to regulate annual or quarterly reports to shareholders.

b. adopt pronouncements of the Financial Accounting Standards Board in all cases. c. regulate financial disclosures for corporate, state, and municipal reporting. d. make rules and regulations pertaining more to disclosure outside the financial statements

than to the setting of accounting recognition and measurement principles.

Key = d 25. All of the following represent communications from the external audit firm to the client except

the

a. engagement letter. b. letter of representation. c. management letter. d. report to the audit committee.

Key = b

26. A Statement of Financial Position prepared in accordance with U.S. GAAP allows investors to

assess all of the following except the

a. efficiency with which enterprise assets are utilized. b. liquidity and financial flexibility of the enterprise. c. capital structure of the enterprise. d. net realizable value of enterprise assets.

Key = d

27. The percentage-of-completion method of accounting for long-term construction contracts is an

exception to the

a. matching principle. b. going concern assumption. c. historical cost principle. d. revenue recognition principle.

Key = d

28. An item of inventory purchased for $25 had been incorrectly written down at the end of last year

to a current replacement cost of $17. The item is currently selling for $50, its normal selling price. The error will affect the financial statements in which one of the following ways? a. The income for last year is overstated. b. The cost of sales for this year will be overstated. c. The income for this year will be overstated. d. The income for this year will be unaffected.

Key = c

29. Pearl Corporation acquired manufacturing machinery on January 1 for $9,000. During the year,

the machine produced 1,000 units, of which 600 were sold. There was no work-in-process inventory at the beginning or at the end of the year. Installation charges of $300 and delivery charges of $200 were also incurred. The machine is expected to have a useful life of five years with an estimated salvage value of $1,500. Pearl uses the straight-line depreciation method. The original cost of the machinery to be recorded in Pearl’s books is

a. $9,500. b. $9,300. c. $9,200. d. $9,000.

Key = a

Solution: Purchase price + installation and delivery charges $9,000 + $300 + $200 30. Which one of the following is not an element of net periodic postretirement benefits?

a. Current payments for the benefit of retirees. b. Return on benefit plan assets. c. Amortization of prior service costs. d. Interest on the accumulated postretirement benefit obligation. Key = a

31. When accounting for pensions, the purpose of the immediate recognition of a minimum liability

is to assure that if a significant plan amendment or actuarial loss occurs, a liability will be recognized at least for the

a. projected benefit obligation. b. accumulated benefit obligation. c. unrecognized prior service cost. d. unfunded accumulated benefit obligation.

Key = d

32. In calculating net cash flow from operating activities using the indirect method, all of the following items would be either added or subtracted from net income except

a. depreciation. b. amortization. c. gain on sale of equipment. d. dividends paid. Key = d

33. All of the following require capitalization of a lease by the lessee except that the

a. lease transfers ownership of the property to the lessee at the end of the lease term. b. lease contains an option for the lessee to purchase the property at fair market value at the end

of the lease term. c. lease term is equal to 75% or more of the estimated economic life of the leased property. d. present value of the minimum lease payments equals or exceeds 90% of the fair value of the

leased property. Key = b

34. Near the end of the fiscal year, Robb Company was notified of a suit by Dawn Company for

patent infringement. Robb’s legal counsel believes it is likely Dawn will prevail, and the amount of damages will be in the range of $300,000 to $350,000. What would be the impact, if any, on the balance sheet for the fiscal year end if Robb makes no provision for the lawsuit in the financial statements?

a. Liabilities would be understated and shareholders’ equity would be overstated. b. Assets would be overstated and shareholders’ equity would be overstated. c. Assets would be overstated and liabilities would be understated. d. There would be no impact. Key = a

35. At the end of the current fiscal year, Premiere Company reported net income of $30,000. In addition, the following information is available.

Prior Fiscal Year Current Fiscal Year Accounts receivable $10,000 $12,000 Inventories 22,000 19,000 Prepaid expenses 6,000 7,000 Accounts payable 14,000 19,000 Long-term debt 70,000 62,000

What amount should be reported as cash flow from operating activities on Premiere’s Statement of Cash Flows for the current fiscal year?

a. $25,000. b. $27,000. c. $33,000. d. $35,000.

Key = d Solution: Net income of $30,000 less increases in accounts receivable of $2,000 and prepaid expenses of $1,000; plus decrease in inventories of $3,000; plus increase in accounts payable of $5,000.

36. On January 2 of the current year Rinehart Company leased a machine to Dana Inc. The lease

terms were 10 annual payments of $20,000, beginning on January 5. At the time of the tenth and final lease payment, the machine is to be purchased by Dana Inc. for $1. Other available information includes the following.

Rinehart’s manufacturing cost $120,000 Present value of the lease payments 135,180 Fair market value 135,180 Interest rate implicit in the lease 10%

What is Rinehart’s gross profit from this lease transaction?

a. $0. b. $11,518. c. $13,518. d. $15,180. Key = d Solution: (FMV of $135,180 less cost of $120,000)

37. On July 1 of the current year, Block Company issued $200,000 of 10% ten-year bonds for

$227,180 when the market rate of interest was 8%. Interest is payable each year on January 1 and July 1, beginning January 1, next year. Assuming the effective interest rate method is used, what amount of interest expense should Block accrue on December 31 of the current year?

a. $8,000. b. $9,087. c. $10,000. d. $11,359. Key = b

Solution: 4% x carrying amount of $227,180 = $9,087

SAMPLE QUESTIONS - PART 3

Section A. Strategic Planning 1. A growth strategy where a company increases the range of products and services offered to

current markets either through internal development or acquisition is called

a. horizontal growth. b. vertical growth. c. conglomerate diversification. d. concentric diversification. Key = a

2. Samsec Inc. has four major divisions, each doing business in a different market. Market growth rates and relative competitive positions for each of these four divisions are shown below. A relative competitive position is defined as the division’s market share relative to the market share of the next largest competitor in the industry.

Business growth rate Relative competitive position Division A 13% 4% Division B 12% 110% Division C 5% 12% Division D 4% 170% Which division most likely does not have the strategic potential to generate a significant level of

cash?

a. Division A. b. Division B. c. Division C. d. Division D. Key = c Division C is a “dog,” i.e., it has low market share and does not have the potential to bring in much cash due to a low competitive position.

3. Pazer Inc. produces portable televisions. Pazer’s product manager proposes to increase the cost

structure by adding voice-activated volume/channel controls to the television, and also adding three additional repair personnel to deal with products returned due to defects. Are these costs value-added or nonvalue-added? Cost of Voice-activated Controls Cost of Additional Repair Personnel a. Value-added Value-added b. Value-added Nonvalue-added c. Nonvalue-added Value-added d. Nonvalue-added Nonvalue-added Key = b

Section B. Strategic Marketing 4. SWOT analysis is concerned primarily with which of the following two factors: a. the internal environment and the external environment. b. market share and market growth. c. product profitability and economic resources. d. customers’ and competitors’ profiles. Key = a 5. The process of dividing all potential consumers into smaller groups of buyers with distinct

needs, characteristics, or behaviors, who might require a similar product or service mix, is called a. strategic planning. b. market segmentation. c. product positioning. d. objective setting. Key = b 6. In marketing toothbrushes as its single product, Hollow Company uses one marketing mix,

believing all toothbrush users have similar needs. Such an approach to target marketing is called a. mass marketing. b. niche marketing. c. micromarketing. d. concentrated marketing. Key = a

7. Many retail stores have found that it is more profitable to sell a product carrying the store’s brand name as opposed to the more well-known brands. This is an example of a

a. manufacturer’s brand. b. national brand. c. private brand. d. co-brand. Key = c Section C. Corporate Finance

8. A firm has daily receipts of $100,000. A bank has offered to reduce the collection time on the

firm’s deposits by two days for a monthly fee of $500. If money market rates are expected to average 6% during the year, the net annual benefit from having this service is a. $0. b. $3,000. c. $6,000. d. $12,000.

Key = c Solution: $100,000 x 2 days x 6% $ 12,000 Additional annual investment income ($500 x 12 ) 6,000 Annual cost Net $ 6,000 Annual benefit 9. Cleveland Masks and Costumes Inc. (CMC) has a majority of its customers located in the states

of California and Nevada. Keystone National Bank, a major west coast bank, has agreed to provide a lock-box system to CMC at a fixed fee of $50,000 per year and a variable fee of $0.50 for each payment processed by the bank. On average, CMC receives 50 payments per day, each averaging $20,000. With the lock-box system, the company’s collection float will decrease by 2 days. The annual interest rate on money market securities is 6%. If CMC makes use of the lock-box system, what would be the net benefit to the company? Use 365 days per year.

a. $51,750. b. $60,875. c. $111,750. d. $120,875. Key = b

Solution: Gross Benefit = Average Payment x Payments per day x Float reduction in days x Opportunity cost Cost = Fixed cost + Variable cost Gross Benefit - Cost = Net Benefit [$20,000 x 50 x 2 x .06] - [$50,000 + (50 x 365 x $0.50)] = $60,875 10. On January 1, Scott Corporation received a $300,000 line of credit at an interest rate of 12%

from Main Street Bank and drew down the entire amount on February 1. The line of credit agreement requires that an amount equal to 15% of the loan be deposited into a compensating balance account. What is the effective annual cost of credit for this loan arrangement?

a. 11.00%. b. 12.00%. c. 12.94%. d. 14.12%. Key = d

Solution:

Interest paid/Available funds $300,000 x 12% = $36,000 Interest $300,000 - (15% x $300,000) = $255,000 Net of compensating balance $36,000/$255,000 = 14.12% Effective annual interest rate

11. Keller Industries currently has a capital structure consisting of 40% debt and 60% equity, which

it believes is the optimal structure. The common stock produced a 12% capital gain in the recent 12-month period and paid a 5% dividend. Keller’s effective income tax rate is 30%. Its debt is rated AA and the issues outstanding are as follows.

• $20 million of 7% coupon bonds with a yield to maturity of 10% • $20 million of 12% coupon bonds with a yield to maturity of 11%

Keller’s investment banker informed the firm that long-term AA rated debt are currently being issued to yield 11%. The banker also estimates that equity investors currently require a 20% pre-tax yield.

Keller’s marginal cost of capital is approximately

a. 12.8%. b. 13.1%. c. 14.7%. d. 15.1%.

Key = d Solution: Weighted after-tax cost of debt + weighted cost of equity [40% x 11%(1 - .30)] + (60% x 20%) = 3.08% + 12.00% = 15.1%

12. Investors in financial securities require a rate of return that

a. compensates for the risk of the security and for time. b. is based on the risk-free rate of return plus a risk premium. c. can be used to determine the value of a financial security. d. satisfies all of the above requirements.

Key = d

Section D. Decision Analysis

13. In a make-versus-buy decision, relevant costs include variable manufacturing costs as well as

a. factory management costs. b. general office costs. c. avoidable fixed costs. d. depreciation costs.

Key = c

14. In accepting or rejecting orders, all of the following costs are relevant except

a. differential costs. b. out-of-pocket costs. c. replacement costs. d. sunk costs.

Key = d 15. To assist a firm’s operating decisions, cost/volume/profit analysis is applicable to all of the

following situations except

a. setting prices when the firm brings a product to market. b. analyzing whether to make or buy a product used in the production process. c. evaluating the effect of replacing a piece of equipment used in the production process. d. determining a unique break-even point when the firm produces multiple product lines.

Key = d

16. Highfield Corporation expects to sell 10,000 units of its product at a target price of $50 per unit. The current full cost of the product is $60 per unit. If Highfield wants to earn an operating profit margin of 20%, the target cost per unit is

a. $10. b. $12. c. $38. d. $40.

Key = d

Solution:

Target price of $50 – target operating profit of $50 x 20% 17. Polar Company sells refrigeration components both in the U.S. and to a subsidiary located in

France. One of the components, Part No. 456, has a variable manufacturing cost of $30. The

part can be sold domestically or shipped to the French subsidiary for use in the manufacture of a residential subassembly. Relevant data with regard to Part No. 456 are shown below.

Part No. 456

Domestic selling price $ 65 Shipping charges to France 15 Cost of acquiring Part No. 456 in France 75 French residential subassembly: Sales price 170 Other additional manufacturing costs 55 Units shipped to France 150,0001

1If deemed preferable, these units could be sold in the U.S.

Polar’s applicable income tax rates are 40% in the U.S. and 70% in France.

Polar will transfer Part No. 456 to the French subsidiary at either variable manufacturing cost or the domestic market price. On the basis of this information, which one of the following strategies should be recommended to Polar’s management?

a. Transfer 150,000 units at $30 and the French subsidiary pays the shipping costs. b. Transfer 150,000 units at $65 and the French subsidiary pays the shipping costs. c. Sell 150,000 units in the U.S. and the French subsidiary obtains Part No. 456 in France. d. Transfer 150,000 units at $65 and have the U.S. company absorb the shipping costs.

Key = c

Solution: c. (Sales less costs) x (1-tax rate) U.S. ($65 - $30) x .6 $21 French ($170 - $75 - $55) x .3 12 Net Profit Per Unit $33 a. French sales only ($170 - $30 - $15 - $55) x .3 = $21. b. U. S. ($65 - $30) x .6 = $21; French sales ($170 - $65 - $15 - $55) x .3 = $10.50; $21 + $10.50

= $31.50 d. U. S. ($65 - $30 - $15) x .6 = $12; French sales ($170 - $65 - $55) x .3 = $15; $12 +$15 = $27

Section E. Investment Decisions 18. Jackson Corporation uses net present value techniques in evaluating its capital investment

projects. The company is considering a new equipment acquisition that will cost $100,000, fully installed, and have a zero salvage value at the end of its five-year productive life. Jackson will depreciate the equipment on a straight-line basis for both financial and tax purposes. Jackson estimates $70,000 in annual recurring operating cash income and $20,000 in annual recurring operating cash expenses. Jackson’s cost of capital is 12% and its effective income tax rate is 40%. What is the net present value of this investment on an after-tax basis?

a. $940. b. $8,150. c. $36,990. d. $51,410. Key = c

Solution: Initial Investment ($100,000) Annual Cash Income $70,000 Annual Cash Expenses 20,000 Net Operating Inflows 50,000 Taxes ($50,000 @ 40%) 20,000 Net After Taxes (x PVIF 3.605) $30,000 108,150 Annual Depreciation Tax Savings: ($100,000/5 x 40% x 3.605) 28,840 Net Present Value of Investment $ 36,990

19. Mega Inc., a large conglomerate with operating divisions in many industries, uses risk-adjusted discount rates in evaluating capital investment decisions. Consider the following statements concerning Mega’s use of risk-adjusted discount rates.

I. Mega may accept some projects with internal rates of return less than Mega’s overall average cost of capital.

II. Discount rates vary depending on the type of project. III. Mega may reject some projects with internal rates of return greater than the cost of

capital. IV. Discount rates may vary depending on the division.

Which of the above statements are correct?

a. I and III, only. b. II and IV, only. c. II, III and IV, only. d. I, II, III and IV.

Key = d

20. Tendulkar Inc. has a project that requires a $40,000,000 initial investment, and is expected to

generate annual after-tax cash flows of $6,000,000 for 12 years. Tendulkar’s weighted average cost of capital is 14%. This project’s net present value (NPV) and the approximate internal rate of return (IRR) are

NPV IRR a. ($6,040,000) 10% b. ($6,040,000) 12% c. ($ 232,000) 10% d. ($ 232,000) 12% Key = a Solution: ($40 million) + PVIF of 5.66 x $6 million = NPV of -$6.04 million Interest rate associated with factor of $40 million/$6 million (6.667) for a 12 year period =

approximately 10%

21. Debrock Corporation has an option to abandon one of its capital investment projects. The option

to abandon makes Debrock the

a. writer of a put option. b. owner of a put option. c. writer of a call option. d. owner of a call option. Key = b

22. A capital budgeting analyst makes the following two statements.

I. Internal rate of return (IRR) is the discount rate that causes the net present value to be $0. II. When we use the IRR method for evaluating projects, we are assuming that all cash flows are

reinvested at IRR%.

Which of the analyst’s statements is (are) true?

a. I only. b. II only. c. Both I and II. d. Neither I nor II.

Key = c

23. QLP Corporation is planning to build a new plant but wishes to complete a capital budgeting

analysis before deciding to proceed with construction. The following cost data has been collected. The land on which the plant will be built was purchased eight years ago for $835,000, but a recent appraisal indicates that the current value of the land is $2.2 million. The plant will cost $8.4 million to construct. Last year, QLP paid a consulting company $800,000 for an environmental impact study on the new plant. What total cost figure should QLP Corporation use in a capital budgeting analysis of the new plant?

a. $9,235,000. b. $11,400,000. c. $10,600,000. d. $10,035,000.

Key = c Solution:

$2.2 million + $8.4 million = $10.6 million

SAMPLE QUESTIONS- PART 4

Sample Essay Question #1. SaveMore Company is a closely-held investment services group that has been very successful over the past five years, consistently providing most members of the management team with substantial bonuses. In addition, both the chief financial officer and the chief executive officer have received 100% bonuses. SaveMore expects this trend to continue. Recently, the top management group of SaveMore, which holds 35% of the outstanding shares of common stock, has learned that a major corporation is interested in acquiring SaveMore. SaveMore’s management is concerned that this corporation may make an attractive offer to the other shareholders and that management would be unable to prevent the takeover. If the acquisition occurs, this executive group is uncertain about continued employment in the new corporate structure. As a consequence, the management group is considering changes to several accounting policies and practices that, although not in accordance with generally accepted accounting principles, would make the company a less attractive acquisition. Management has told Aram Deerling, SaveMore’s controller, to implement some of these changes. Deerling has also been informed that SaveMore’s management does not intend to immediately disclose these changes to anyone outside of the immediate top management group. Answer all of the following requirements: A. Referring to the specific standards of competence, confidentiality, integrity and/or credibility from IMA’s Statement of Ethical Professional Practice evaluate

1. the changes SaveMore Company’s top management group is considering. 2. Aram Deerling’s responsibilities as a management accountant.

B. Identify all of the specific steps Aram Deerling should take to resolve the situation described above. Use IMA’s Statement of Ethical Professional Practice to support your answer. C. Discuss social and ethical responsibilities that a company should consider before taking defensive actions such as those described above.

Draft Answer – SaveMore Company A.l. The changes SaveMore Company’s top management group is considering are evaluated as follows.

- Competence: Top management’s request of Aram Deerling to account for the company’s information in a manner that is not in accordance with generally accepted accounting principles is in violation of the standard to “perform professional duties in accordance with relevant laws, regulations, and technical standards.” Also, the restriction on information disclosure has violated the standard to “provide decision support information and recommendations that are accurate, clear, concise, and timely.”

- Confidentiality: Top management has violated the ethical standard of “refraining from using confidential information for unethical or illegal advantage, (personal job security).

- Integrity: Top management clearly is in violation of the standard to “avoid actual or apparent conflicts of interest and advise all appropriate parties (such as other shareholders) of any potential conflict.”

- Integrity: The motivation for top management in this circumstance appears to be reinforced by the favorable bonus situation, which is in violation of the standard to “refrain from engaging in any conduct that would prejudice carrying out duties ethically”, and “abstain from engaging in or supporting any activity that might discredit the profession .”

- Integrity: By telling Deerling to restrict the disclosure of the acquisition information, top management has violated the standard to “communicate unfavorable as well as favorable information.”

- Credibility: Top management’s restriction and distortion of SaveMore’s financial information violates the standard to “communicate information fairly and objectively.”

A.2. Deerling’s responsibilities as a management accountant are as follows.

- Competence: Deerling must “perform professional duties in accordance with relevant laws, regulations, and technical standards.”

- Integrity: Deerling must “refrain from engaging in any conduct that would prejudice carrying out duties ethically.”

- Integrity: Deerling must “abstain from engaging in or supporting any activity that might discredit the profession.”

- Credibility: Deerling must “communicate information fairly and objectively.” - Credibility: Deerling must “disclose fully all relevant information that could reasonably

be expected to influence an intended user’s understanding of the reports.” B. If SaveMore Company has an established policy in place, Deerling should follow those policies on the resolution of ethical conflict. If no policy exists, the specific steps are:

- Reporting to the next higher level, and successively higher levels, perhaps to the Audit Committee of the Board of Directors or the Chair of the Board of Directors, as the company’s top management appears to be fully involved in the situation.

- Clarifying relevant concepts by confidential discussion with an IMA Ethics Counselor or other impartial advisor to obtain a better understanding by possible courses of action.

- Consult your own attorney as to legal obligations and rights concerning the ethical conflict.

C. The primary social and ethical responsibility that a company has before taking defensive actions is its fiduciary responsibility to the shareholders. Other responsibilities include the effects on any other stakeholders such as bondholders, creditors, employees, customers, and the community. Also, management has an ethical responsibility to inform its external auditors, legal advisors, etc., so as not to put them in a compromising position.

Sample Essay Question #2. RealTalk Inc. manufactures specialized video-conferencing equipment. Production of specialized units is generally performed under contract while standard units are produced in accordance with marketing projections. Maintenance of customer equipment is an essential service provided and accounts for a significant portion of revenue. Recent economic conditions have caused a decline in RealTalk’s business. Below is RealTalk’s Income Statement for the fiscal year just ended.

RealTalk, Inc.

Income Statement ($000 omitted) For the Year Ended June 30, 2004

Equipment sales $6,000 Revenue from maintenance contracts 1,800 Total sales 7,800 Cost of goods sold 4,600 Customer maintenance expense 1,000 Selling expense 600 Administrative expense 900 Interest expense 150 Total expenses 7,250 Income before income taxes 550 Income taxes 220 Net income $ 330

RealTalk’s return on sales before interest and taxes was 9% for the year just ended, while the industry average was 12%. The company’s total asset turnover was 3 times, and its return on average assets before interest and taxes was 27%, both well below industry averages. To improve performance and raise these ratios nearer to, or above, industry averages, the president of RealTalk has established the following goals for the coming year: (1) 11% return on sales before interest and taxes, (2) 4 times total asset turnover, and (3) 35% return on average assets before interest and taxes.

To achieve these goals, RealTalk’s management team took into consideration the growing international video-conferencing market and proposed the following actions for the coming year.

• Increase sales prices for equipment by 10%.

• Increase the cost of each unit sold by 3% for needed technology and quality improvements.

• Increase maintenance inventory by $250,000 at the beginning of the year and add two maintenance technicians at a total cost of $130,000 to improve customer service and response time. The increased inventory will be financed at an annual interest rate of 12%; no other borrowings or loan reductions are contemplated during the coming year. All other assets will be held to the same levels as the year just ended.

• Increase selling expenses by $250,000 but hold administrative expenses to the same level as the year just ended.

It is expected that these actions will increase equipment unit sales by 6%, with a corresponding 6% growth in maintenance contracts.

Answer all of the following requirements: A. Prepare a Pro Forma Income Statement for RealTalk Inc. for the fiscal year ending June 30, 2005, on the assumption that the proposed actions are implemented as planned and that the increased sales objectives will be met. (Assume a 40% effective tax rate and round all numbers to the nearest thousand, i.e., $000 omitted.)

B. Determine if the president’s goals will be achieved by calculating the following ratios for the year ended June 30, 2005: (1) Return on sales before interest and taxes, (2) Total asset turnover, and (3) Return on average assets before interest and taxes.

C. Discuss the limitations and difficulties that can be encountered in using ratio analysis, particularly when making comparisons to industry averages.

Draft Answer - RealTalk A.

RealTalk Inc. Pro Forma Income Statement

For the Year Ending June 30, 2005 ($000 omitted) Equipment sales ($6,000 x 1.06 x 1.10) $6,996Maintenance contracts ($1800 x 1.06) 1,908 Total sales 8,904 Cost of goods sold ($4,600 x 1.03 x 1.06) 5,022Customer maintenance expense ($1,000 + $130) 1,130Selling expense ($600 + $250) 850Administrative expense 900Interest expense [$150 + ($250 x .12)] 180

Total expenses 8,082 Income before taxes 822

Income taxes ($822 x .4) 329Net income $ 493

B. Return on sales before interest EBIT / Sales 11.25% & taxes ($493 + 329 + 180) / $8904 Exceeds

11% goal Total asset turnover Sales / Average assets 3.12 times $8,904 / ($2,600* +250) Does not achieve 4

x *$7,800 / 3 (2004 turnover) Return on avg. assets before EBIT / Average assets 35.15% interest & taxes (493 + 329 + 180) / (2,600 + 250) Exceeds

35% goal

C. Identical companies may use different valuation or expense methods, making comparability difficult. Special circumstances not encountered by the industry may be the cause of deviation from the industry. A blend of techniques should be used with ratio analysis when making comparisons to the industry.

Sample Question #3. AnySport is a wholesale distributor supplying a wide range of moderately priced sporting equipment to large retail stores. About 60% of AnySport’s products are purchased from other companies while the remainder of the products are manufactured by AnySport. The company has a Plastics Department that is currently manufacturing molded fishing tackle boxes. AnySport is able to manufacture and sell 8,000 tackle boxes annually, making full use of its direct labor capacity at available work stations. The selling price and costs associated with AnySport’s tackle boxes are: Selling price per box $86.00 Costs per box Molded plastic $ 8.00 Hinges, latches, handle 9.00 Direct labor ($15.00/hr.) 18.75 Manufacturing overhead 12.50 Selling expense 17.00 65.25 Profit per box $20.75 Because AnySport believes it could sell 12,000 tackle boxes if it had sufficient manufacturing capacity, the company has looked into the possibility of purchasing the tackle boxes for distribution. Maple Products, a steady supplier of quality products, would be able to provide up to 9,000 tackle boxes per year at a price of $68.00 per box delivered to AnySport’s facility.

Mark Rochet, AnySport’s product manager, has suggested that the company could make better use of its Plastics Department by manufacturing skateboards. To support his position, Rochet has a market study that indicates an expanding market for skateboards and a need for additional suppliers. Rochet believes that AnySport could expect to sell 17,500 skateboards annually at a price of $45.00 per skateboard. Rochet’s estimate of the costs to manufacture the skateboards is: Selling price per skateboard $45.00 Costs per skateboard Molded plastic $5.50 Wheels, hardware 7.00 Direct labor ($15.00/hr.) 7.50 Manufacturing overhead 5.00 Selling expense 9.00 34.00 Profit per skateboard $11.00

In the Plastics Department, AnySport uses direct labor hours as the application base for manufacturing overhead. Included in the manufacturing overhead for the current year is $50,000 of factory-wide, fixed manufacturing overhead that has been allocated to the Plastics Department. The unit variable overhead cost associated with the manufactured tackle box is $6.25 and $2.50 for the manufactured skateboard. In addition, for each unit of product that AnySport sells, regardless of whether the product has been purchased or is manufactured by AnySport, there is an allocated $6.00 fixed overhead cost per unit for distribution that is included in the selling cost for all products. Total selling costs for the purchased tackle boxes would be $10.00 per unit.

Answer the following: In order to maximize the company’s profitability, prepare an analysis based on the data presented that will show which product or products AnySport should manufacture and/or purchase and will show the associated financial impact. Support your answer with appropriate calculations. Draft Answer - AnySport In order to maximize the company’s profitability, AnySport should purchase 9,000 tackle boxes from Maple Products, manufacture 17,500 skateboards, and manufacture 1,000 tackle boxes. This combination of purchased and manufactured goods maximizes the contribution per direct labor hour available. Unit contribution: Purchased Manufactured Manufactured Tackle Box Tackle Box Skateboard Selling price $86.00 $86.00 $45.00 Less: Material 68.00 17.00 12.50 Direct labor -- 18.75 7.50 Manufacturing overhead -- 6.25 2.50 Selling cost* 4.00 11.00 3.00 Contribution $14.00 $33.00 $19.50 * $6 of fixed overhead must be deducted from selling cost.

Optimal use of available direct labor: DLH* Total Balance Unit Total Item Quantity per Unit DLH of DLH Contribution Contribution Total DLH Available 10,000 Skateboards 17,500 .50 8,750 1,250 $19.50 $341,250 Make boxes 1,000 1.25 1,250 0 33.00 33,000 Buy boxes 9,000 0 0 0 14.00 126,000 Total contribution $500,250 Less: Contribution from manufacturing 8,000 boxes 264,000 Increase in contribution $236,250 * Boxes = $18.75/$15.00; Skateboards = $7.50/$15.00

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