Gleim CMA Test Prep: Part 2: Financial Decision Making
(1635 questions)

[1]

The Foreign Corrupt Practices Act prohibits

A.
B.
C.
D.

Bribes to all foreigners.
Small bribes to foreign officials that serve as facilitating or grease payments.
Bribery only by corporations and their representatives.
Bribes to foreign officials to influence official acts.
Answer (A) is incorrect because Bribes to all foreigners is not covered by the provisions in the FCPA.
Answer (B) is incorrect because Small bribes to foreign officials that serve as facilitating or grease payments is not
covered by the provisions in the FCPA.
Answer (C) is incorrect because All U.S. firms are subject to the anti-bribery provisions.
Answer (D) is correct. The Foreign Corrupt Practices Act (FCPA) prohibits any U.S. firm from making bribes to
foreign officials to influence official acts. The businesses subject to the FCPA include corporations, partnerships,
limited partnerships, business trusts, and unincorporated organizations. Violations of the FCPA are federal
felonies. The penalties are up to 5 years in prison or up to a $100,000 fine or both for an officer, director, or
shareholder who helps make the bribe.

[2]

A major impact of the Foreign Corrupt Practices Act of 1977 is that registrants subject to the Securities Exchange Act of
1934 are now required to

A. Keep records that reflect the transactions and dispositions of assets and to maintain a system of internal accounting
controls.
B. Provide access to records by authorized agencies of the federal government.
C. Prepare financial statements in accord with international accounting standards.
D. Produce full, fair, and accurate periodic reports on foreign commerce and/or foreign political party affiliations.
Answer (A) is correct. The main purpose of the Foreign Corrupt Practices Act of 1977 is to prevent bribery by
firms that do business in foreign countries. A major ramification is that it requires all companies that must register
with the SEC under the Securities Exchange Act of 1934 to maintain adequate accounting records and a system of
internal accounting control.
Answer (B) is incorrect because Authorized agents of the federal government already have access to records of
SEC registrants.
Answer (C) is incorrect because Although some international accounting standards have been promulgated, they
are incomplete and have not gained widespread acceptance.
Answer (D) is incorrect because There are no requirements for providing periodic reports on foreign commerce or
foreign political party affiliations.

[3]

The reporting of accounting information plays a central role in the regulation of business operations. The importance of
sound internal control practices is underscored by the Foreign Corrupt Practices Act of 1977 which requires publicly
owned U.S. corporations to maintain systems of internal control that meet certain minimum standards. Preventive
controls are an integral part of virtually all accounting processing systems, and much of the information generated by the
accounting system is used for preventive control purposes. Which one of the following is not an essential element of a
sound preventive control system?

A.
B.
C.
D.


Separation of responsibilities for the recording, custodial, and authorization functions.
Sound personnel practices.
Documentation of policies and procedures.
Implementation of state-of-the-art software and hardware.

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Gleim CMA Test Prep: Part 2: Financial Decision Making
(1635 questions)

Answer (A) is incorrect because Segregation of functions makes it more difficult for one person both to perpetrate and
conceal an irregularity.
Answer (B) is incorrect because Hiring honest and capable employees prevents many problems.
Answer (C) is incorrect because Documentation provides a guide for conduct.
Answer (D) is correct. Preventive controls are designed to prevent an error or irregularity from occurring. State-of-the-art
hardware and software would presumably incorporate the latest control features, but a less advanced system could very
well contain a sound preventive control structure. Hence, state-of-the-art components are not essential for effective
control.

[4]

What law prohibits U.S. companies from paying bribes to foreign officials for the purpose of obtaining or retaining
business?

A.
B.

C.
D.

Federal Ethical Standards Act.
Robinson-Patman Act.
Foreign Corrupt Practices Act.
North American Free Trade Agreement.
Answer (A) is incorrect because The Federal Ethical Standards Act does not deal with international payments.
Answer (B) is incorrect because The Robinson-Patman Act of 1936 prohibits price discrimination.
Answer (C) is correct. The Foreign Corrupt Practices Act of 1977 prohibits bribes to foreign officials for purposes
of obtaining or retaining business. The Act also requires companies to maintain effective systems of internal
control.
Answer (D) is incorrect because The North American Free Trade Agreement (NAFTA), passed in 1993, provides
for free trade among the nations of Canada, Mexico, and the U.S.

[5]

Which of the following is not an aspect of the Foreign Corrupt Practices Act of 1977?

A.
B.
C.
D.

It subjects management to fines and imprisonment.
It prohibits bribes to foreign officials.
It requires the establishment of independent audit committees.
It requires an internal control system to be developed and maintained.
Answer (A) is incorrect because This is a provision of the Act.
Answer (B) is incorrect because This is a provision of the Act.

Answer (C) is correct. The Foreign Corrupt Practices Act of 1977 prohibits bribes to foreign officials and requires
firms to have adequate systems of internal control. Violation of the Act subjects individual managers to fines
and/or imprisonment. The Act does not specifically require the establishment of audit committees, but many firms
have established audit committees as one means of dealing with the internal control provisions of the Act.
Answer (D) is incorrect because This is a provision of the Act.

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Page 2


Gleim CMA Test Prep: Part 2: Financial Decision Making
(1635 questions)

[6]

Firms subject to the reporting requirements of the Securities Exchange Act of 1934 are required by the Foreign Corrupt
Practices Act of 1977 to maintain satisfactory internal control. The role of the independent auditor relative to this Act is
to

A. Report clients with unsatisfactory internal control to the SEC.
B. Provide assurances to users as part of the traditional audit attest function that the client is in compliance with the
present legislation.
C. Express an opinion on the sufficiency of the client’s internal control to meet the requirements of the Act.
D. Attest to the financial statements.
Answer (A) is incorrect because The auditor is not required to report violations of the Act to the SEC, although a
duty to disclose outside the client may exist in some circumstances; e.g., the client’s failure to take remedial action
regarding an illegal act may constitute a disagreement that it must report on Form 8-K (AU 317).
Answer (B) is incorrect because The traditional attest function does not involve compliance auditing.

Answer (C) is incorrect because The FCPA contains no requirement that an auditor express an opinion on internal
control.
Answer (D) is correct. Whether a client is in conformity with the Foreign Corrupt Practices Act is a legal
question. Auditors cannot be expected to provide clients or users of the financial statements with legal advice. The
role of the auditor is to assess control risk in the course of an engagement to attest to the fair presentation of the
financial statements.

[7]

The requirement of the Foreign Corrupt Practices Act of 1977 to devise and maintain adequate internal control is
assigned in the Act to the

A.
B.
C.
D.

Chief financial officer.
Board of directors.
Director of internal auditing.
Company as a whole with no designation of specific persons or positions.
Answer (A) is incorrect because Compliance with the FCPA is not the specific responsibility of the chief financial
officer.
Answer (B) is incorrect because Compliance with the FCPA is not the specific responsibility of the board of
directors.
Answer (C) is incorrect because Compliance with the FCPA is not the specific responsibility of the director of
internal auditing.
Answer (D) is correct. The accounting requirements apply to all public companies that must register under the
Securities Exchange Act of 1934. The responsibility is thus placed on companies, not individuals.


[8]

Which of the following corporations are subject to the accounting requirements of the Foreign Corrupt Practices Act
(FCPA)?

A.
B.
C.
D.

All corporations engaged in interstate commerce.
All domestic corporations engaged in international trade.
All corporations that have made a public offering under the Securities Act of 1933.
All corporations whose securities are registered pursuant to the Securities Exchange Act of 1934.
Answer (A) is incorrect because The accounting requirements apply only to publicly held companies registered
under the 1934 act.
Answer (B) is incorrect because The accounting requirements apply only to publicly held companies registered
under the 1934 act.

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Gleim CMA Test Prep: Part 2: Financial Decision Making
(1635 questions)

Answer (C) is incorrect because The accounting requirements apply only to publicly held companies registered under the
1934 act.

Answer (D) is correct. The accounting requirements of the FCPA apply to all companies required to register and report under
the Securities Exchange Act of 1934. These companies must maintain books, records, and accounts in reasonable detail that
accurately and fairly reflect transactions. The FCPA also requires these companies to maintain a system of internal accounting
control that provides certain reasonable assurances, including that corporate assets are not used for bribes.

[9]

The Foreign Corrupt Practices Act of 1977 prohibits bribery of foreign officials. Which of the following statements
correctly describes the act’s application to corporations engaging in such practices?

A.
B.
C.
D.

It applies only to multinational corporations.
It applies to all domestic corporations engaged in interstate commerce.
It applies only to corporations whose securities are registered under the Securities Exchange Act of 1934.
It applies only to corporations engaged in foreign commerce.
Answer (A) is incorrect because The FCPA antibribery provisions apply to all corporations engaged in interstate
commerce (and also to any form of business organization, not just to corporations).
Answer (B) is correct. Although the requirements of the FCPA relating to the maintenance of accounting records
and systems of internal accounting control apply only to companies required to register under the Securities
Exchange Act of 1934, the antibribery provisions apply to all domestic business concerns engaged in interstate
commerce.
Answer (C) is incorrect because Although the requirements of the FCPA relating to the maintenance of accounting
records and systems of internal accounting control apply only to companies required to register under the
Securities Exchange Act of 1934, the antibribery provisions apply to all domestic business concerns engaged in
interstate commerce.
Answer (D) is incorrect because The FCPA antibribery provisions apply to all corporations engaged in interstate

commerce (and also to any form of business organization, not just to corporations).

[10] Under the Foreign Corrupt Practices Act (FCPA), an action may be brought that seeks

A.
B.
C.
D.

Treble damages by a private party.
Injunctive relief by a private party.
Criminal sanctions against both the corporation and its officers by the Department of Justice.
Damages and injunctive relief by the Securities and Exchange Commission.
Answer (A) is incorrect because Private parties may not bring an action under the FCPA.
Answer (B) is incorrect because Private parties may not bring an action under the FCPA.
Answer (C) is correct. The SEC may investigate violations of the FCPA, bring civil actions for its enforcement,
and recommend that the Justice Department prosecute criminal violations.
Answer (D) is incorrect because Although the SEC is empowered to seek injunctions, the Justice Department must
seek penalties. Damages are sought by private parties who cannot sue under this statute.

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Gleim CMA Test Prep: Part 2: Financial Decision Making
(1635 questions)

[11] The U.S. Foreign Corrupt Practices Act is particularly focused on the dealings of financial institutions and the

safeguarding of the global financial system. Financial institutions must implement robust controls to ensure knowledge of
their customers and the nature of their business transactions and be in a position to prove to regulators a high level of due
diligence. These safeguards are required to minimize all of the following except

A.
B.
C.
D.

Money laundering.
Insider trading.
Terrorist financing.
Extortion and bribery.
Answer (A) is incorrect because Money laundering is one focus of the safeguards of the global financial system
relating to the U.S. Foreign Corrupt Practices Act.
Answer (B) is correct. The safeguards of the global financial system relating to the U.S. Foreign Corrupt Practices
Act deal with minimizing money laundering, terrorist financing, and extortion and bribery. Insider trading is not a
focus of the safeguards.
Answer (C) is incorrect because Terrorist financing is one focus of the safeguards of the global financial system
relating to the U.S. Foreign Corrupt Practices Act.
Answer (D) is incorrect because Extortion and bribery are focuses of the safeguards of the global financial system
relating to the U.S. Foreign Corrupt Practices Act.

[12] Corporations have the responsibility to issue financial statements that are timely, accurate, and transparent, reflecting all
the transactions of the company. Which of the following documents refer to this responsibility?
I.
II.
III.
IV.


A.
B.
C.
D.

IMA’s Statement of Ethical Professional Practice
SOX Section 406: Code of Ethics for Senior Financial Officers
IMA’s Statement on Management Accounting “Values and Ethics: From Inception to Practice”
U.S. Foreign Corrupt Practices Act

I and II only.
I and III only.
II and III only.
II and IV only.
Answer (A) is incorrect because The IMA’s Statement of Ethical Professional Practice discusses ethical principles
and standards that should be followed by members of the IMA. This does not refer to the responsibility to issue
financial statements that are timely, accurate, and transparent, reflecting all the transactions of the company.
Answer (B) is incorrect because The IMA’s Statement on Management Accounting “Values and Ethics: From
Inception to Practice” is a useful document for understanding ethical concepts in an organizational context. This
does not refer to the responsibility to issue financial statements that are timely, accurate, and transparent, reflecting
all the transactions of the company. The IMA’s Statement of Ethical Professional Practice discusses ethical
principles and standards that should be followed by members of the IMA. This does not refer to the responsibility
to issue financial statements that are timely, accurate, and transparent, reflecting all the transactions of the
company.
Answer (C) is incorrect because The IMA’s Statement on Management Accounting “Values and Ethics: From
Inception to Practice” is a useful document for understanding ethical concepts in an organizational context. This
does not refer to the responsibility to issue financial statements that are timely, accurate, and transparent, reflecting
all the transactions of the company.
Answer (D) is correct. SOX Section 406: Code of Ethics for Senior Financial Officers and the U.S. Foreign
Corrupt Practices Act both refer to the corporate responsibility to issue financial statements that are timely,

accurate, and transparent, reflecting all the transactions of the company.

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Gleim CMA Test Prep: Part 2: Financial Decision Making
(1635 questions)

[13] IMA’s Statement on Management Accounting, “Values and Ethics: From Inception to Practice,” recommends a defined
code of conduct and ethical behavior for all organizations. One advantage of having such a code is that it

A.
B.
C.
D.

Provides employees with guidance for handling unfamiliar situations.
Ensures ethical behavior by all employees.
Shields the organization from liability in cases of loss of stockholder value due to fraud.
Eases the investigative process performed by police and prosecutors in cases of suspected fraud.
Answer (A) is correct. “Values and Ethics: From Inception to Practice” states, in part, “... what does an employee
do when unplanned events occur? What reference does an individual look to for help in making decisions? ... This
is why it is important to have a defined set of organizational values and code of ethics – they create the
“touchstone” against which every unanticipated decision must be judged. Failure to have every individual in the
organization know and understand these values and ethical code leads to inconsistency and, in the worst cases,
unethical or fraudulent behavior.” (IV. Values, Ethics, and Accounting.)
Answer (B) is incorrect because A code of conduct cannot guarantee ethical behavior by employees.

Answer (C) is incorrect because A code of conduct cannot guarantee that an organization will be shielded from
liability in cases of fraud.
Answer (D) is incorrect because A code of conduct does not ease law enforcement’s investigative process.

[14] Which one of the following is a true statement regarding organizational ethics?

A. As long as officer and employee behavior meet the requirements of the law, the organization can be considered to
have a functioning system of ethical behavior.
B. A strong sense of ethics on the part of employees who are in the best position to appropriate cash and other assets
is the most vital part of a functioning system of ethical behavior.
C. If an organization has a strong code of ethical conduct in place, the role of employee training can be downplayed.
D. Paying attention to “whistleblowers” plays a significant role in maintaining an effective ethical atmosphere.
Answer (A) is incorrect because A sense of ethics requires an ability to distinguish between ethical and merely
legal behavior. “Values and Ethics: From Inception to Practice” states, in part, “Many individuals at the center of
corporate scandals [of the late 20th and early 21st Century] have professed the belief that they were innocent of
any wrongdoing, including Kenneth Lay of Enron or Conrad Black of Hollinger. The problem is that these
individuals did not define their behavior by what most of society would see as ‘reasonable,’ but rather they
followed their own particular code – in some cases, limiting the definition of ethical behavior to require
compliance with the law and nothing more.” (II. Introduction.)
Answer (B) is incorrect because “Values and Ethics: From Inception to Practice” states, in part, “Ethical behavior
is not something that applies to someone else – every single individual is responsible for behaving ethically.
Nowhere is this more important than the demonstration of ethical behavior that managers and supervisors exhibit
in the way they execute their day-to-day work...” This phenomenon is referred to as the “tone at the top.”
(VI. Leadership by Example.)
Answer (C) is incorrect because Employee training is important to maintaining an ethical organizational culture.
“Values and Ethics: From Inception to Practice” states, in part, “Every existing member of staff should receive
ongoing training, starting at the board level and cascading down throughout the organization ... Ethics training for
employees should focus on covering ethical concepts, the organization’s code, and compliance. To achieve this,
training should include: ethical concepts and thinking: What is ‘behind’ the issue of ethical action?; [and] the
organization’s code of ethics and any supporting ‘rules.’” (VIII. Practical Application: Converting Intent into

Operational Reality.)
Answer (D) is correct. “Values and Ethics: From Inception to Practice” states, in part, “A whistleblowing
framework (e.g., an ethics helpline) is an important component in maintaining an ethical organizational culture.
An effective feedback system includes having a confidential framework for employees to report possible violations
of the organization’s code of ethics and to receive advice on the ethical aspects of challenging decisions. Statistics
show that a large number of occupational fraud cases are detected through an employee “hotline” or other
reporting method ... ” (IX. Measuring and Improving Ethical Compliance.)

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Gleim CMA Test Prep: Part 2: Financial Decision Making
(1635 questions)

[15] Which one of the following is a true statement regarding organizational ethics?

A. A comprehensive framework of corporate ethical behavior is a prerequisite for an effective system of internal
control.
B. An effective system of internal control is a prerequisite for corporate ethical behavior.
C. If a functioning system of ethical behavior is in place, an organization is able to devote fewer resources to
developing human capital.
D. “Organizational culture” is determined mostly by the industry(ies) in which the firm operates.
Answer (A) is correct. A comprehensive framework of corporate ethical behavior is a prerequisite for an effective
system of internal control. “Values and Ethics: From Inception to Practice” states, in part, “CEOs and CFOs have
to place their own integrity on the line by attesting to compliance with an adequate level of internal controls (as
well as all other certifications). Creating a thorough, integrated system for developing, implementing, sustaining,
and monitoring ethical performance within the organization will allow executives to make such declarations with

confidence that a code of ethics is the foundation of the organization’s culture and is fully integrated into the
thinking process of every employee and business partner.” (IX. Measuring and Improving Ethical Compliance.)
Answer (B) is incorrect because It is more nearly true to state the opposite.
Answer (C) is incorrect because The concept of “human capital” is important to an organization in creating a
climate where “doing the right thing” is expected. In most organizations today, labor costs constitute the majority
of operating expenses. “Values and Ethics: From Inception to Practice” states, in part, “...an organization must, to
a great degree, trust that its employees are acting in its best interests. Human ‘capital’ is a critical asset ...
Unmotivated employees can poison the atmosphere and reduce the teamwork and cooperation required for
knowledge transfer and innovation, and they can have a significant negative impact on relationships with suppliers
and customers.” (IV. Values, Ethics, and Accounting.)
Answer (D) is incorrect because “Values and Ethics: From Inception to Practice” states, in part, “Every
organization already has a culture ... Step one in establishing an ethical culture must be an assessment of the
existing organizational values and culture and the development of a set of statements that define the principles the
organization believes in and should act upon. These statements and principles can be developed by the
shareholders, the board, or a governing body within the organization.” (V. Defining and Developing the
Organization’s Behavioral Values.)

[16] The basic financial statements include a

A. Balance sheet, income statement, statement of retained earnings, and statement of changes in retained earnings.
B. Statement of financial position, income statement, statement of retained earnings, and statement of changes in
retained earnings.
C. Balance sheet, statement of financial position, income statement, and statement of changes in retained earnings.
D. Statement of financial position, income statement, statement of cash flows, and statement of retained earnings.
Answer (A) is incorrect because The statement of changes in retained earnings is not a separate financial
statement.
Answer (B) is incorrect because The statement of changes in retained earnings is not a separate financial
statement.
Answer (C) is incorrect because The statement of changes in retained earnings is not a separate financial
statement.

Answer (D) is correct. Under GAAP, the basic required statements are the statements of financial position,
income, cash flows, and retained earnings. Changes in equity must be disclosed in the basic statements, the notes,
or a separate statement. A statement of cash flows is now a required part of a full set of financial statements of all
business entities (both publicly held and privately held). Moreover, comprehensive income must be displayed in a
financial statement given the same prominence as other statements, but no specific format is required as long as
net income is displayed as a component of comprehensive income in the statement.

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Gleim CMA Test Prep: Part 2: Financial Decision Making
(1635 questions)

[17] Financial statement users with a direct economic interest in a specific business include

A.
B.
C.
D.

Financial advisers.
Regulatory bodies.
Stock markets.
Suppliers.
Answer (A) is incorrect because Financial advisers have indirect interests.
Answer (B) is incorrect because Regulatory bodies have indirect interests.
Answer (C) is incorrect because Stock markets have indirect interests.

Answer (D) is correct. Users with direct interests include investors or potential investors, suppliers and creditors,
employees, and management.

[18] A primary objective of external financial reporting is

A. Direct measurement of the value of a business enterprise.
B. Provision of information that is useful to present and potential investors, creditors, and others in making rational
financial decisions regarding the enterprise.
C. Establishment of rules for accruing liabilities.
D. Direct measurement of the enterprise’s stock price.
Answer (A) is incorrect because Financial reporting is not designed to measure directly the value of a business.
Answer (B) is correct. According to the FASB’s Conceptual Framework, the objectives of external financial
reporting are to provide information that (1) is useful to present and potential investors, creditors, and others in
making rational financial decisions regarding the enterprise; (2) helps those parties in assessing the amounts,
timing, and uncertainty of prospective cash receipts from dividends or interest and the proceeds from sale,
redemption, or maturity of securities or loans; and (3) concerns the economic resources of an enterprise, the claims
thereto, and the effects of transactions, events, and circumstances that change its resources and claims thereto.
Answer (C) is incorrect because While rules for accruing liabilities are a practical concern, the establishment of
such rules is not a primary objective of external reporting.
Answer (D) is incorrect because The objectives of financial accounting are unrelated to the measurement of stock
prices; stock prices are a product of stock market forces.

[19] Notes to financial statements are beneficial in meeting the disclosure requirements of financial reporting. The notes
should not be used to

A. Describe significant accounting policies.
B. Describe depreciation methods employed by the company.
C. Describe principles and methods peculiar to the industry in which the company operates, when these principles
and methods are predominantly followed in that industry.
D. Correct an improper presentation in the financial statements.

Answer (A) is incorrect because It describes an appropriate and required disclosure that should appear in the notes
to the financial statements.
Answer (B) is incorrect because It describes an appropriate and required disclosure that should appear in the notes
to the financial statements.

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Gleim CMA Test Prep: Part 2: Financial Decision Making
(1635 questions)

Answer (C) is incorrect because It describes an appropriate and required disclosure that should appear in the notes to the
financial statements.
Answer (D) is correct. Financial statement notes should not be used to correct improper presentations. The financial
statements should be presented correctly on their own. Notes should be used to explain the methods used to prepare the
financial statements and the amounts shown. The first footnote typically describes significant accounting policies.

[20] Which of the following is not a need of financial statement users?

A.
B.
C.
D.

Financial advisers and analysts need financial statements to help investors evaluate particular investments.
Stock exchanges need financial statements to set a firm’s stock price.
Regulatory agencies need financial statements to evaluate price changes for regulated industries.

Employees need financial information to negotiate wages and fringe benefits.
Answer (A) is incorrect because Financial advisers use financial statements for evaluating investments.
Answer (B) is correct. Investors’ purchases and sales set stock prices. Stock exchanges need financial statements
to evaluate whether to accept a firm’s stock for listing or whether to suspend trading in the stock.
Answer (C) is incorrect because Regulatory agencies use financial statements for rate making.
Answer (D) is incorrect because Employees use financial statements for labor negotiations.

[21] The management of ABC Corporation is analyzing the financial statements of XYZ Corporation because ABC is strongly
considering purchasing a block of XYZ common stock that would give ABC significant influence over XYZ. Which
financial statement should ABC primarily use to assess the amounts, timing, and uncertainty of future cash flows of XYZ
Company?

A.
B.
C.
D.

Income statement.
Statement of retained earnings.
Statement of cash flows.
Balance sheet.
Answer (A) is incorrect because The statement of income is prepared on an accrual basis and is not meant to
report cash flows.
Answer (B) is incorrect because The statement of retained earnings merely shows the reasons for changes in
retained earnings during the reporting period.
Answer (C) is correct. The primary purpose of a statement of cash flows is to provide information about the cash
receipts and cash payments of a business enterprise during a period. This information helps investors, creditors,
and other users to assess (1) the enterprise’s ability to generate net cash inflows; (2) its ability to meet its
obligations, and pay dividends; (3) its needs for external financing; (4) the reasons for the differences between net
income and net cash flow; and (5) the effects of cash and noncash financing and investing activities.

Answer (D) is incorrect because The balance sheet reports on financial position at a moment in time. It does not
provide information about future cash flows.

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Gleim CMA Test Prep: Part 2: Financial Decision Making
(1635 questions)

[22] The primary purpose of the statement of financial position is to reflect

A.
B.
C.
D.

The fair value of the firm’s assets at some moment in time.
The status of the firm’s assets in case of forced liquidation of the firm.
The success of a company’s operations for a given amount of time.
Items of value, debt, and net worth.
Answer (A) is incorrect because The measurement attributes of assets include but are not limited to fair value.
Answer (B) is incorrect because Financial statements reflect the going concern assumption. Hence, they usually do
not report forced liquidation values.
Answer (C) is incorrect because The income statement provides this type of information.
Answer (D) is correct. The balance sheet presents three major financial accounting elements: assets (items of
value), liabilities (debts), and equity (net worth). According to the FASB’s Conceptual Framework, assets are
probable future economic benefits resulting from past transactions or events. Liabilities are probable future

sacrifices of economic benefits arising from present obligations as a result of past transactions or events. Equity is
the residual interest in the assets after deduction of liabilities.

[23] Prepaid expenses are valued on the statement of financial position at the

A.
B.
C.
D.

Cost to acquire the asset.
Face amount collectible at maturity.
Cost to acquire minus accumulated amortization.
Cost less expired or used portion.
Answer (A) is incorrect because The cost must be reduced by the expired or used portion of the prepaid asset.
Answer (B) is incorrect because Prepaid expenses will not be collected at maturity.
Answer (C) is incorrect because Prepaid expenses are not depreciated; they expire.
Answer (D) is correct. Prepaid expenses, such as supplies, prepaid rent, and prepaid insurance, are reported on
the balance sheet at cost minus the expired or used portion. These are typically current assets.

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Page 10


Gleim CMA Test Prep: Part 2: Financial Decision Making
(1635 questions)

[Fact Pattern #1]

A company’s pre-closing trial balance and other pertinent information at December 31 are as follows. The opening balance of
inventory was $140,000. The long-term debt pays interest at a rate of 10% per annum, payable every 12 months. The debt was
issued on July 1 of the current year and originally had 5 years to maturity. The fixed assets have a 10-year estimated useful life
and were 1 year old at the start of the current year. Straight-line depreciation is used by the company.

Cash
Accounts receivable
Inventory
Gross fixed assets
Accumulated depreciation
Accounts payable
Long-term debt
Common stock
Retained earnings (Jan. 1)
Sales revenue
Purchases
Administrative expenses

Dr.
$ 80,000
100,000
230,000
600,000

Cr.

60,000
180,000
1,000,000
210,000

500,000
750,000
530,000
200,000

[24] (Refers to Fact Pattern #1)
The company will report year-end total assets of

A.
B.
C.
D.

$800,000
$890,000
$950,000
$1,010,000
Answer (A) is incorrect because Using the beginning balance of inventory results in $800,000.
Answer (B) is correct. The year-end total assets can be determined by summing all of the assets and deducting
accumulated depreciation (including the current year’s depreciation). Total accumulated depreciation at the end of
the second year is $120,000 [($600,000 ÷ 10 years) × 2 years]. Total assets equal $890,000 ($80,000 cash +
$100,000 A/R + $230,000 EI + $600,000 gross fixed assets – $120,000 accumulated depreciation).
Answer (C) is incorrect because Omitting second-year depreciation from the calculation results in $950,000.
Answer (D) is incorrect because Omitting total accumulated depreciation from the calculation results in
$1,010,000.

[25] A statement of financial position allows investors to assess all of the following except the

A.
B.

C.
D.

Efficiency with which enterprise assets are used.
Liquidity and financial flexibility of the enterprise.
Capital structure of the enterprise.
Net realizable value of enterprise assets.
Answer (A) is incorrect because Efficiency of asset use is assessed by calculating liquidity, leverage, and asset
management ratios. These ratios require balance sheet data.
Answer (B) is incorrect because Liquidity and financial flexibility are assessed by calculating liquidity, leverage,
and asset management ratios. These ratios require balance sheet data.

Copyright 2008 Gleim Publications, Inc.
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Gleim CMA Test Prep: Part 2: Financial Decision Making
(1635 questions)

Answer (C) is incorrect because The capital structure of the enterprise is reported in the equity section of the statement of
financial position.
Answer (D) is correct. Assets are usually measured at original historical cost in a statement of financial position, although
some exceptions exist. For example, some short-term receivables are reported at their net realizable value. Thus, the statement
of financial position cannot be relied upon to assess NRV.

[26] The accounting equation (assets – liabilities = equity) reflects the

A.

B.
C.
D.

Entity point of view.
Fund theory.
Proprietary point of view.
Enterprise theory.
Answer (A) is incorrect because The entity concept limits accounting information to that related to a specific
entity (possibly not the same as the legal entity).
Answer (B) is incorrect because Fund theory stresses that assets equal obligations (equity and liabilities are
sources of assets).
Answer (C) is correct. The equation is based on the proprietary theory. Equity in an enterprise is what remains
after the economic obligations of the enterprise are deducted from its economic resources.
Answer (D) is incorrect because The enterprise concept stresses ownership of the assets; that is, the emphasis is on
the credit side of the balance sheet.

[27] Karen’s Crafts, Inc., has the following accounts included in its December 31 trial balance:
Accounts payable
Discount on bonds payable
Wages payable
Interest payable
Bonds payable
(Issued 1/1/Year 1; due 1/1/Year 20)
Income taxes payable

$250,000
34,000
29,000
14,000

500,000
26,000

What amount of current liabilities will be reported on Karen’s December 31 statement of financial position?

A.
B.
C.
D.

$285,000
$319,000
$353,000
$819,000
Answer (A) is incorrect because The discount on bonds payable is erroneously deducted from the total.
Answer (B) is correct. Current liabilities consist of those debts that will have to be paid in the coming year or the
normal operating cycle, whichever period is longer. Examples include accounts payable, wages payable, interest
payable, and income taxes payable. Bonds payable and its contra account, discount on bonds payable, would both
be shown under the long-term liability classification. The total current liabilities would be $319,000 ($250,000 +
$29,000 + $14,000 + $26,000).
Answer (C) is incorrect because The amount of $353,000 includes discount on bonds payable.
Answer (D) is incorrect because The amount of $819,000 includes bonds payable.

Copyright 2008 Gleim Publications, Inc.
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Page 12


Gleim CMA Test Prep: Part 2: Financial Decision Making

(1635 questions)

[28] Perry Mansfield Corporation has the following accounts included in its December 31 trial balance:
Accounts receivable
Inventories
Patents
Prepaid insurance
Accounts payable
Cash

$110,000
250,000
90,000
19,500
72,000
28,000

What amount of current assets should Perry Mansfield include in its statement of financial position at December 31?

A.
B.
C.
D.

$335,500
$388,000
$407,500
$479,500
Answer (A) is incorrect because Deducting accounts payable from the current assets results in the amount of
working capital, rather than the total of current assets.

Answer (B) is incorrect because It fails to include prepaid insurance in the total.
Answer (C) is correct. Current assets consist of cash, certain marketable securities, receivables, inventories, and
prepaid expenses. Adding these elements together produces a total of $407,500 ($28,000 cash + $110,000
receivables + $250,000 inventories + $19,500 prepaid insurance).
Answer (D) is incorrect because It erroneously includes accounts payable.

[29] Long-term obligations that are or will become callable by the creditor because of the debtor’s violation of a provision of
the debt agreement at the balance sheet date should be classified as

A. Long-term liabilities.
B. Current liabilities unless the debtor goes bankrupt.
C. Current liabilities unless the creditor has waived the right to demand repayment for more than 1 year from the
balance sheet date.
D. Contingent liabilities until the violation is corrected.
Answer (A) is incorrect because Such obligations must be current liabilities.
Answer (B) is incorrect because Bankruptcy is not an exception.
Answer (C) is correct. Long-term obligations that are or will become callable by the creditor because of the
debtor’s violation of a provision of the debt agreement at the balance sheet date normally are classified as current
liabilities. However, the debt need not be reclassified if the violation will be cured within a specified grace period
or if the creditor formally waives or subsequently loses the right to demand repayment for a period of more than a
year from the balance sheet date (also, reclassification is not required if the debtor expects and has the ability to
refinance the obligation on a long-term basis).
Answer (D) is incorrect because Such obligations are not contingent.

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Page 13



Gleim CMA Test Prep: Part 2: Financial Decision Making
(1635 questions)

[30] Abernathy Corporation uses a calendar year for financial and tax reporting purposes and has $100 million of mortgage
bonds due on January 15, Year 2. By January 10, Year 2, Abernathy intends to refinance this debt with new long-term
mortgage bonds and has entered into a financing agreement that clearly demonstrates its ability to consummate the
refinancing. This debt is to be

A.
B.
C.
D.

Classified as a current liability on the statement of financial position at December 31, Year 1.
Classified as a long-term liability on the statement of financial position at December 31, Year 1.
Retired as of December 31, Year 1.
Considered off-balance-sheet debt.
Answer (A) is incorrect because The company intends to refinance the debt on a long-term basis.
Answer (B) is correct. Short-term obligations expected to be refinanced should be reported as current liabilities
unless the firm both plans to refinance and has the ability to refinance the debt on a long-term basis. The ability to
refinance on a long-term basis is evidenced by a post-balance-sheet date issuance of long-term debt or a financing
arrangement that will clearly permit long-term refinancing.
Answer (C) is incorrect because The debt has not been retired.
Answer (D) is incorrect because The debt is on the balance sheet.

[31] Lister Company intends to refinance a portion of its short-term debt in Year 2 and is negotiating a long-term financing
agreement with a local bank. This agreement would be noncancelable and would extend for a period of 2 years. The
amount of short-term debt that Lister Company can exclude from its statement of financial position at December 31,
Year 1,


A.
B.
C.
D.

May exceed the amount available for refinancing under the agreement.
Depends on the demonstrated ability to consummate the refinancing.
Is reduced by the proportionate change in the working capital ratio.
Is zero unless the refinancing has occurred by year end.
Answer (A) is incorrect because The amount excluded cannot exceed the amount available for refinancing.
Answer (B) is correct. If an enterprise intends to refinance short-term obligations on a long-term basis and
demonstrates an ability to consummate the refinancing, the obligations should be excluded from current liabilities
and classified as noncurrent. The ability to consummate the refinancing may be demonstrated by a post-balancesheet-date issuance of a long-term obligation or equity securities, or by entering into a financing agreement that
meets certain criteria. These criteria are that the agreement does not expire within 1 year, it is noncancelable by the
lender, no violation of the agreement exists at the balance sheet date, and the lender is financially capable of
honoring the agreement.
Answer (C) is incorrect because The correct accounting treatment does not depend on changes in ratios.
Answer (D) is incorrect because The refinancing need not have occurred if the firm intends and demonstrates an
ability to consummate such refinancing.

[32] When treasury stock is accounted for at cost, the cost is reported on the balance sheet as a(n)

A.
B.
C.
D.

Asset.
Reduction of retained earnings.
Reduction of additional paid-in-capital.

Unallocated reduction of equity.
Answer (A) is incorrect because Treasury stock is not an asset. A corporation cannot own itself.

Copyright 2008 Gleim Publications, Inc.
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Page 14


Gleim CMA Test Prep: Part 2: Financial Decision Making
(1635 questions)

Answer (B) is incorrect because Treasury stock accounted for at cost is subtracted from the total of the other equity accounts.
Answer (C) is incorrect because Treasury stock accounted for at cost is subtracted from the total of the other equity accounts.
Answer (D) is correct. Treasury stock is a corporation’s own stock that has been reacquired but not retired. In the balance
sheet, treasury stock recorded at cost is subtracted from the total of the capital stock balances, additional paid-in capital,
retained earnings, and accumulated other comprehensive income.

[33] When a company was in the process of closing its original store, no accounting notice of the liquidation values of the
discontinued store’s assets were considered in the accounting records. The accountant did not make any entries until the
assets were disposed of because the company was still a going concern. However, when liquidation of a business is
foreseen but not yet accomplished, a different financial statement is prepared. This statement is known as the

A.
B.
C.
D.

Statement of liquidation.
Charge and discharge statement.

Statement of realization.
Statement of affairs.
Answer (A) is incorrect because The statement prepared by the trustee in bankruptcy to reconcile the book
amounts to his/her administration of the estate is the statement of realization and liquidation.
Answer (B) is incorrect because A charge and discharge statement is prepared by the personal representative of a
decedent’s estate.
Answer (C) is incorrect because The statement prepared by the trustee in bankruptcy to reconcile the book
amounts to his/her administration of the estate is the statement of realization and liquidation.
Answer (D) is correct. A statement of affairs is prepared for a company in the process of liquidation. It reflects the
financial condition of the company on a going out of business rather than a going concern basis. Liquidation value
instead of historical cost is used to value assets.

[34] Felicity Company has the following accounts included in its December 31 trial balance:
Treasury stock
Retained earnings
Trademarks
Preferred stock
Common stock
Deferred income taxes
Additional paid-in capital
Accumulated depreciation

$ 48,000
141,000
32,000
175,000
50,000
85,000
196,000
16,000


What amount of equity will be reported on Felicity’s December 31 statement of financial position?

A.
B.
C.
D.

$373,000
$514,000
$562,000
$610,000
Answer (A) is incorrect because Retained earnings should be included in equity.

Copyright 2008 Gleim Publications, Inc.
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Page 15


Gleim CMA Test Prep: Part 2: Financial Decision Making
(1635 questions)

Answer (B) is correct. Equity consists of contributed capital, retained earnings, and accumulated other comprehensive
income. Equity accounts may therefore include retained earnings, preferred stock, common stock, and additional paid-in
capital. Treasury stock is a contra account in the equity section of the balance sheet. The total is $514,000 ($141,000 +
$175,000 + $50,000 + $196,000 – $48,000).
Answer (C) is incorrect because The amount of $562,000 results from a failure to deduct treasury stock.
Answer (D) is incorrect because Treasury stock should be deducted from, not added to, equity.


[35] Which of the following assets is normally considered the most liquid?

A.
B.
C.
D.

Goodwill.
Land.
Inventory.
Accounts receivable.
Answer (A) is incorrect because Goodwill is an intangible asset and is classified in the long-term assets section of
the balance sheet.
Answer (B) is incorrect because Land is included in property, plant, and equipment and is not readily convertible
to cash.
Answer (C) is incorrect because Inventory takes longer to convert to cash than accounts receivable.
Answer (D) is correct. Assets presented on the balance sheet are listed in descending order of liquidity, which
allows users of financial statements to identify the assets that will be available first to meet current liabilities. An
asset that is readily convertible to cash is considered very liquid. Accounts receivable typically has more liquidity
than inventory and therefore is listed above inventory in the current assets section of the balance sheet.

[36] A corporation issues a balance sheet and income statement for the current year and comparative income statements for
each of the 2 previous years. A statement of cash flows

A.
B.
C.
D.

Should be issued for the current year only.

Should be issued for the current and the previous year only.
Should be issued for all 3 years.
May be issued at the company’s option for any or all of the 3 years.
Answer (A) is incorrect because A statement of cash flows must be provided for all 3 years.
Answer (B) is incorrect because A statement of cash flows must be provided for all 3 years.
Answer (C) is correct. When a business enterprise provides a set of financial statements that reports both financial
position and results of operations, it must also present a statement of cash flows for each period for which the
results of operations are provided.
Answer (D) is incorrect because The statement of cash flows is not optional in these circumstances.

Copyright 2008 Gleim Publications, Inc.
Printed for Bahaa Hassan

Page 16


Gleim CMA Test Prep: Part 2: Financial Decision Making
(1635 questions)

[37] When classifying assets as current and noncurrent for reporting purposes,

A. The amounts at which current assets are carried and reported must reflect realizable cash values.
B. Prepayments for items such as insurance or rent are included in an “other assets” group rather than as current
assets as they will ultimately be expensed.
C. The time period by which current assets are distinguished from noncurrent assets is determined by the seasonal
nature of the business.
D. Assets are classified as current if they are reasonably expected to be realized in cash or consumed during the
normal operating cycle.
Answer (A) is incorrect because Current assets are measured using different attributes, for example, lower of cost
or market for inventory and net realizable value for accounts receivable.

Answer (B) is incorrect because Prepayments may qualify as current assets. They often will be consumed during
the operating cycle.
Answer (C) is incorrect because The classification criterion is based on the normal operating cycle regardless of
the seasonality of the business.
Answer (D) is correct. For financial reporting purposes, current assets consist of cash and other assets or
resources expected to be realized in cash, sold, or consumed during the longer of 1 year or the normal operating
cycle of the business.

[38] A statement of financial position is intended to help investors and creditors

A.
B.
C.
D.

Assess the amount, timing, and uncertainty of prospective net cash inflows of a firm.
Evaluate economic resources and obligations of a firm.
Evaluate economic performance of a firm.
Evaluate changes in the ownership equity of a firm.
Answer (A) is incorrect because Providing information to help assess the amount, timing, and uncertainty of cash
flows is an objective of the statement of cash flows.
Answer (B) is correct. The statement of financial position, or balance sheet, provides information about an
entity’s resource structure (assets) and financing structure (liabilities and equity) at a moment in time. According
to the FASB’s Conceptual Framework, the statement of financial position does not purport to show the value of a
business, but it enables investors, creditors, and other users to make their own estimates of value. It helps users to
assess liquidity, financial flexibility, profitability, and risk.
Answer (C) is incorrect because The primary focus of financial reporting is information about an enterprise’s
performance provided by measures of earnings and its components. Hence, an income statement is more directly
useful to investors and creditors for evaluating economic performance.
Answer (D) is incorrect because Disclosures of changes in shareholders’ equity, in either the basic statements, the

notes thereto, or a separate statement, help users to evaluate changes in the ownership equity of a firm.

[39] All other things being equal, which one of the following factors would result in an increase in cash reported on the
balance sheet from one period to the next?

A.
B.
C.
D.

Reduction of the days’ sales outstanding in accounts receivable.
Decrease in the accrued vacation liability.
Increase in the level of inventory held.
Increase in the speed with which accounts payable invoices are paid.

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Gleim CMA Test Prep: Part 2: Financial Decision Making
(1635 questions)

Answer (A) is correct. A reduction of the days’ sales outstanding in accounts receivable signifies that the company is
collecting accounts receivables at a faster pace, meaning an increase in the cash reported on the balance sheet on the next
period.
Answer (B) is incorrect because A decrease in the accrued vacation liability signifies that liabilities are being paid,
meaning a decrease in the cash reported on the balance sheet on the next period.
Answer (C) is incorrect because An increase in the level of inventory being held signifies more purchases in the next

period, meaning either a decrease in cash (if the inventory was bought with cash) or an increase in liabilities (if the
inventory was purchased on credit). Either way, this would not increase cash.
Answer (D) is incorrect because A increase in the speed with which accounts payable invoices are paid signifies a faster
outflow of cash for payment of the liabilities, meaning a decrease in the cash reported on the balance sheet.

[40] Each of the following statements about the balance sheet is true except

A.
B.
C.
D.

It is a picture of the firm’s financial position at a particular point in time.
It presents the firm’s assets and claims against those assets.
It helps users assess the firm’s liquidity.
It shows the sources and uses of cash.
Answer (A) is incorrect because The balance sheet is a picture of the firm’s financial position at a particular point
in time.
Answer (B) is incorrect because The balance presents the firm’s assets and claims against those assets.
Answer (C) is incorrect because The balance sheet helps users assess the firm’s liquidity.
Answer (D) is correct. Sources and uses of cash are shown in the statement of cash flows.

[41] An income statement for a business prepared under the current operating performance concept would include only the
recurring earnings from its normal operations and

A.
B.
C.
D.


No other items.
Any extraordinary items.
Any prior-period adjustments.
Any gains or losses from extinguishment of debt.
Answer (A) is correct. The current operating performance concept emphasizes the ordinary, normal, recurring
operations of the entity during the current period. In this view, the inclusion of extraordinary items or prior-period
adjustments is believed to impair the significance of net income. (The current operating performance concept is
not recognized under U.S. GAAP.)
Answer (B) is incorrect because Extraordinary items are excluded under the current operating performance
concept.
Answer (C) is incorrect because Prior-period adjustments are excluded under the current operating performance
concept.
Answer (D) is incorrect because Gains and losses from extinguishment of debt are extraordinary.

Copyright 2008 Gleim Publications, Inc.
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Page 18


Gleim CMA Test Prep: Part 2: Financial Decision Making
(1635 questions)

[42] The major distinction between the multiple-step and single-step income statement formats is the separation of

A.
B.
C.
D.


Operating and nonoperating data.
Income tax expense and administrative expenses.
Cost of goods sold expense and administrative expenses.
The effect on income taxes due to extraordinary items and the effect on income taxes due to income before
extraordinary items.
Answer (A) is correct. Within the income from continuing operations classification, the single-step income
statement provides one grouping for revenue items and one for expense items. The single-step is the one
subtraction necessary to arrive at income from continuing operations prior to the effect of income taxes. In
contrast, the multiple-step income statement matches operating revenues and expenses separately from
nonoperating items. This format emphasizes subtotals such as gross margin, operating income, and nonoperating
income within presentation of income from continuing operations.
Answer (B) is incorrect because The major distinction is the separation of operating and nonoperating data.
Answer (C) is incorrect because The major distinction is the separation of operating and nonoperating data.
Answer (D) is incorrect because The major distinction is the separation of operating and nonoperating data.

[43] In a multiple-step income statement for a retail company, all of the following are included in the operating section except

A.
B.
C.
D.

Sales.
Cost of goods sold.
Dividend revenue.
Administrative and selling expenses.
Answer (A) is incorrect because Sales is part of the normal operations of a retailer.
Answer (B) is incorrect because Cost of goods sold is part of the normal operations of a retailer.
Answer (C) is correct. The operating section of a retailer’s income statement includes all revenues and costs
necessary for the operation of the retail establishment, e.g., sales, cost of goods sold, administrative expenses, and

selling expenses. Dividend revenue, however, is classified under other revenues. In a statement of cash flows, cash
dividends received are considered an operating cash flow.
Answer (D) is incorrect because Administrative and selling expenses are part of the normal operations of a retailer.

Copyright 2008 Gleim Publications, Inc.
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Page 19


Gleim CMA Test Prep: Part 2: Financial Decision Making
(1635 questions)

[44] In Hopkins Co.’s Year 3 single-step income statement, the section titled Revenues consisted of the following:
Net sales revenue
Results from discontinued operations:
Income from operations of component
(including gain on disposal of $21,600)
Income tax
Interest revenue
Gain on sale of equipment
Cumulative change in Year 1 and Year 2
income due to change in depreciation
method (net of $750 tax effect)
Total revenues

$187,000

$18,000
(6,000)


12,000
10,200
4,700

1,500
$215,400

In the revenues section of the Year 3 income statement, Hopkins should have reported total revenues of

A.
B.
C.
D.

$217,800
$215,400
$203,700
$201,900
Answer (A) is incorrect because The amount of $217,800 equals $215,400 reported total revenues, plus the
$2,400 loss from operations of the segment.
Answer (B) is incorrect because The amount of $215,400 improperly includes the results from discontinued
operations and the cumulative-effect type change.
Answer (C) is incorrect because The amount of $203,700 improperly subtracts interest revenue and does not
adjust for the results from discontinued operations.
Answer (D) is correct. Revenue is a component of income from continuing operations. Results of discontinued
operations is a classification in the income statement separate from continuing operations. The cumulative effect
of a change in accounting principle is not reported in the income statement. Hence, total revenues were $201,900
($215,400 – $12,000 results from discontinued operations – $1,500 cumulative-effect type change). Alternatively,
total revenues consist of net sales of $187,000, plus interest revenue of $10,200, plus gain on sale of equipment

(which is not an extraordinary item) of $4,700.

[45] When reporting extraordinary items,

A. Each item (net of tax) is presented on the face of the income statement separately as a component of net income
for the period.
B. Each item is presented exclusive of any related income tax.
C. Each item is presented as an unusual item within income from continuing operations.
D. All extraordinary gains or losses that occur in a period are summarized as total gains and total losses, then offset to
present the net extraordinary gain or loss.
Answer (A) is correct. Extraordinary items are reported net of tax after discontinued operations.
Answer (B) is incorrect because Extraordinary items are to be reported net of the related tax effect.
Answer (C) is incorrect because Extraordinary items are not reported in the continuing operations section of the
income statement.
Answer (D) is incorrect because Each extraordinary item is to be reported separately.

Copyright 2008 Gleim Publications, Inc.
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Page 20


Gleim CMA Test Prep: Part 2: Financial Decision Making
(1635 questions)

[46] Which one of the following items is included in the determination of income from continuing operations?

A.
B.
C.

D.

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

[47] Brett Corporation had retained earnings of $529,000 at January 1 of the current year. Net income for the year was
$2,496,000, and cash dividends of $750,000 were declared and paid. Another $50,000 of dividends were declared late in
December, but were unpaid at year end. Brett’s ending balance of its statement of retained earnings is

A.
B.
C.
D.

$1,696,000
$2,225,000
$2,275,000
$3,025,000

Answer (A) is incorrect because The amount of $1,696,000 does not include the beginning balance.
Answer (B) is correct. Dividends declared but not paid reduce retained earnings. Thus, the year-end balance of
retained earnings is calculated as follows:
January 1 balance
Net income

$ 529,000
2,496,000

Retained earnings available
Dividends paid during year
Dividends declared in Dec.
Year-end balance

$3,025,000
$750,000
50,000

(800,000)
$2,225,000

Answer (C) is incorrect because The amount of $2,275,000 results from a failure to deduct the dividend that was
unpaid; such a dividend would be a liability of the corporation.
Answer (D) is incorrect because The amount of $3,025,000 results from a failure to deduct dividends.

Copyright 2008 Gleim Publications, Inc.
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Page 21



Gleim CMA Test Prep: Part 2: Financial Decision Making
(1635 questions)

[48] The changes in account balances of the Samson Corporation during the year are presented below:
Increase
Assets
Liabilities
Capital stock
Additional paid-in capital

$356,000
108,000
240,000
24,000

Assuming there are no charges to retained earnings other than for a dividend payment of $52,000, the net income for the
year should be

A.
B.
C.
D.

$16,000
$36,000
$52,000
$68,000
Answer (A) is incorrect because The amount of $16,000 is the excess of the sum of the increases in the capital
accounts other than retained earnings over the increase in net assets.

Answer (B) is correct. To calculate net income, the dividend payment ($52,000) should be added to the increase
in assets ($356,000). The excess of this sum ($408,000) over the increase in liabilities ($108,000) gives the total
increase in owners’ equity ($300,000). The excess of this amount over the combined increases in the capital
accounts ($264,000) equals the increase in retained earnings ($36,000) arising from net income.
Answer (C) is incorrect because The amount of $52,000 is the dividend.
Answer (D) is incorrect because The amount of $68,000 equals the sum of the dividend and the excess of the sum
of the increases in the capital accounts other than retained earnings over the increase in net assets.

[49] When a business enterprise provides a full set of general-purpose financial statements reporting financial position, results
of operations, and cash flows, comprehensive income and its components should

A. Appear as a part of discontinued operations, extraordinary items, and cumulative effect of a change in accounting
principle.
B. Be reported net of related income tax effects, in total and individually.
C. Appear in a supplemental schedule in the notes to the financial statements.
D. Be displayed in a financial statement that has the same prominence as other financial statements.
Answer (A) is incorrect because Discontinued operations and extraordinary items are components of net income,
which is itself a component of comprehensive income. The cumulative effect of a change in accounting principle
is not reported in the income statement.
Answer (B) is incorrect because The components of OCI are displayed either (1) net of related tax effects or
(2) before the related tax effects with one amount shown for the aggregate tax effect related to the total of OCI. No
amount is displayed for the tax effect related to total comprehensive income.
Answer (C) is incorrect because Comprehensive income and its components must be displayed in a financial
statement given the same prominence as other financial statements included in the full set of financial statements.
Answer (D) is correct. If an enterprise that reports a full set of financial statements has items of other
comprehensive income (OCI), it must display comprehensive income and its components in a financial statement
having the same prominence as the other statements included in the full set. No particular format is required, but
net income must be displayed as a component of comprehensive income in that statement.

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Page 22


Gleim CMA Test Prep: Part 2: Financial Decision Making
(1635 questions)

[Fact Pattern #2]
The Horatio Company’s beginning and ending inventories for the fiscal year ended September 30, Year 2, are

Oct. 1, Year 1
Materials
Work-in-process (WIP)
Finished goods

$30,000
80,000
16,000

Sept. 30, Year 2
$44,000
70,000
24,000

Production data for the fiscal Year ended September 30,
Year 2, are
Materials purchased
Purchase discounts taken
Direct labor

Manufacturing overhead

$160,000
2,000
200,000
150,000

[50] (Refers to Fact Pattern #2)
Horatio’s cost of goods manufactured (COGM) for the Year ended September 30, Year 2, is

A.
B.
C.
D.

$484,000
$494,000
$504,000
$518,000
Answer (A) is incorrect because This amount results from reversing the effect of the change in WIP.
Answer (B) is incorrect because This amount does not consider the change in WIP.
Answer (C) is correct. COGM equals all manufacturing costs incurred during the period, plus BWIP, minus
EWIP. Materials used equals $144,000 ($30,000 BI + $160,000 purchased – $2,000 discounts – $44,000 EI).
Thus, manufacturing costs incurred during the period equal $494,000 ($144,000 materials used + $200,000 DL +
$150,000 OH), and COGM equals $504,000 ($494,000 + $80,000 BWIP – $70,000 EWIP).
Answer (D) is incorrect because This amount does not consider the change in materials inventory.

[51] (Refers to Fact Pattern #2)
Horatio’s cost of goods sold (COGS) for the year ended September 30, Year 2, is


A.
B.
C.
D.

$500,000
$504,000
$508,000
$496,000
Answer (A) is incorrect because This amount results from reversing the treatment of purchase discounts.
Answer (B) is incorrect because This amount is the COGM.
Answer (C) is incorrect because This amount results from assuming that no beginning or ending inventories of
materials, WIP, or finished goods existed.
Answer (D) is correct. COGS equals COGM adjusted for the change in finished goods inventory. COGM equals
all manufacturing costs incurred during the period, plus BWIP, minus EWIP. Materials used equals $144,000
($30,000 BI + $160,000 purchased – $2,000 discounts – $44,000 EI). Thus, manufacturing costs incurred during
the period equal $494,000 ($144,000 materials used + $200,000 DL + $150,000 OH), and COGM equals
$504,000 ($494,000 + $80,000 BWIP – $70,000 EWIP). Accordingly, COGS is $496,000 ($504,000 COGM +
$16,000 BFG – $24,000 EFG).

Copyright 2008 Gleim Publications, Inc.
Printed for Bahaa Hassan

Page 23


Gleim CMA Test Prep: Part 2: Financial Decision Making
(1635 questions)

[52] (Refers to Fact Pattern #2)

The total value of inventory to be reported on Horatio’s balance sheet at September 30, Year 2, is

A.
B.
C.
D.

$44,000
$70,000
$24,000
$138,000
Answer (A) is incorrect because This amount is the ending materials inventory.
Answer (B) is incorrect because This amount is the EWIP.
Answer (C) is incorrect because This amount is the finished goods inventory.
Answer (D) is correct. The ending inventory consists of three elements: materials of $44,000, WIP of $70,000,
and finished goods of $24,000, a total of $138,000.

[53] Which of the following items should be reported as a component of other comprehensive income (OCI)?

A.
B.
C.
D.

Unrealized loss on an investment classified as a trading security.
Unrealized loss on an investment classified as an available-for-sale security.
Realized loss on an investment classified as an available-for-sale security.
Cumulative effect of a change in accounting principle.
Answer (A) is incorrect because Unrealized gains and losses on trading securities are components of net income.
Answer (B) is correct. Comprehensive income includes all changes in equity (net assets) of a business entity

except those changes resulting from investments by owners and distributions to owners. Comprehensive income
includes two major categories: net income and OCI. Net income includes the results of operations classified as
income from continuing operations, discontinued operations, and extraordinary items. Components of
comprehensive income not included in the determination of net income are included in OCI; for example,
unrealized gains and losses on available-for-sale securities (except those that are hedged items in a fair value
hedge).
Answer (C) is incorrect because Realized gains and losses on available-for-sale securities are components of net
income.
Answer (D) is incorrect because The cumulative effect of a change in accounting principle is not reported in the
income statement.

Copyright 2008 Gleim Publications, Inc.
Printed for Bahaa Hassan

Page 24


Gleim CMA Test Prep: Part 2: Financial Decision Making
(1635 questions)

[Fact Pattern #3]
A company’s pre-closing trial balance and other pertinent information at December 31 are as follows. The opening balance of
inventory was $140,000. The long-term debt pays interest at a rate of 10% per annum, payable every 12 months. The debt was
issued on July 1 of the current year and originally had 5 years to maturity. The fixed assets have a 10-year estimated useful life
and were 1 year old at the start of the current year. Straight-line depreciation is used by the company.

Cash
Accounts receivable
Inventory
Gross fixed assets

Accumulated depreciation
Accounts payable
Long-term debt
Common stock
Retained earnings (Jan. 1)
Sales revenue
Purchases
Administrative expenses

Dr.
$ 80,000
100,000
230,000
600,000

Cr.

60,000
180,000
1,000,000
210,000
500,000
750,000
530,000
200,000

[54] (Refers to Fact Pattern #3)
On the year-end financial statements, the company will report cost of goods sold of

A.

B.
C.
D.

$440,000
$530,000
$620,000
$670,000
Answer (A) is correct. Cost of goods sold equals beginning inventory, plus purchases, minus ending inventory.
Hence, cost of goods old is $440,000 ($140,000 + $530,000 – $230,000).
Answer (B) is incorrect because Purchases equals $530,000.
Answer (C) is incorrect because Reversing the opening and closing inventory figures results in $620,000.
Answer (D) is incorrect because Omitting closing inventory from the calculation results in $670,000.

[55] Which one of the following would be shown on a multiple-step income statement but not on a single-step income
statement?

A.
B.
C.
D.

Loss from discontinued operations.
Gross profit.
Extraordinary gain.
Net income from continuing operations.
Answer (A) is incorrect because Loss from discontinued operations is shown on both a multiple-step and a singlestep income statement.
Answer (B) is correct. A single-step income statement combines all revenues and gains, combines all expenses
and losses, and subtracts the latter from the former in a “single step” to arrive at net income. Gross profit, being
the difference between sales revenue and cost of goods sold, does not appear on a single-step income statement.


Copyright 2008 Gleim Publications, Inc.
Printed for Bahaa Hassan

Page 25