Part1 SU1 2015 Rev2

Part 1
Study Unit 1
ICMAs Requirements for CMA Designation
Become a Member! Preferably of a local chapter (there are

benefits).
Pass both parts of the exam within 3 years (of starting the process).
Satisfy the education requirements.
Satisfy the experience requirements.
Comply with IMAs Statement of Ethical Professional Practice.
To remain a CMA you have to maintain active member, full-fill the
requirements for CE, comply with IMAs Ethics statements and
applicable state laws.
Gleim CMA Review System
Gleim Suggested Study Steps see page 8
Alternative steps per Ron
Multiple Choice Quizzes
Audiovisual Presentation
True/False Study Questions
Knowledge Transfer Outline
Essay
CMA Test Prep Online
Practice Exam vs. Study Session
Exam format
3 hrs - 100 multiple choice questions = approx. 1.5 minutes per question (on
average).
Find ways to bank time
Look for short-cuts
You will find that you most question do not seem easy, dont get discouraged
You earn points for each question answered correctly
Some questions are test questions that carry no point value. You will not know which ones
they are
Extra time can be carried forward to the Essay portion
1 hr - 2 Essay questions with up to 8 sub-parts

You cant go back to multiple-choice part once you enter this portion of the exam
Whatever you have typed on the screen will be saved as your answer, irrespective if the timer
runs out on you
Exam format
If you find you have weaknesses in any topic ref. Appendix A for ref. the
appropriate sub units.
The coverage percentage given for each major topic within each examination
part represents the relative weight given to that topic in an examination part.
The number of questions presented in each major topic area approximates
this percentage.
You will be expected to understand the impact of taxes when reporting and
analyzing financial results.
You are assumed to have knowledge of preparation of financial statements,
business economics, time-value of money concepts, statistics and probability.
Most common reasons for missing questions
1. Misreading the requirement (stem) Read the question first

2. Not understanding what is required
3. Making a math error Try to not do calculations of paper first, with the idea of transferring to
the exam later. If you know how to use your memory button(s) well on your calculator, use it (i.e.
save sub-calculations in your calculator).
4. Applying the wrong rule or concept
5. Being distracted by one or more of the answers the most common wrong answers are the
incorrect alternatives
6. Incorrectly eliminating answers from considerations read all answers first, some are more
correct or complete then others
7. Not having any knowledge of the topic tested dont agonize over it. If possible try to make an
educated guess by eliminating obvious wrong answers. If you guess, use the same letter each
time.
8. Employing bad intuition when guessing
Required Cognitive Skills
Knowledge: Ability to remember previously learned material such as specific facts,
criteria, techniques, principles, and procedures (identify, define).
Comprehension: Ability to grasp and interpret the menaing of material (classify,
explain, distinguish).
Application: Ability to break down material into its component parts so that its
organizational structure can be understood(differentiate, estimate, order).
Synthesis: Ability to put parts together to form a new whole or proposed set of
operations; ability to relate ideas and formulate hypothesis (combine, formulate,
revise).
Evaluation: Ability to judge the value of material for a given purpose on the basis
of consistency, logical accuracy, and comparison to standards (criticize, justify,
conclude).
The essays
Remember, 2 essay questions with up to 8 parts each!
The ICMA grades on both subject matter and writing skills on the essay portion of the CMA
exam. For writing skills to be graded, the response must be relevant to the question asked.
The criteria for grading are as follows:
Use of standard English includes proper grammar, punctuation, and spelling
Organization response is arranged logically and coherently
Clarity analysis is clearly communicated with well-constructed sentences and
appropriate vocabulary.
The CMA exam uses essays to reflect a more "real-world" environment in which candidates
must apply the knowledge they have acquired. Essays are graded on both writing skills and
subject matter. Partial credit IS available for essays that have some correct and some
incorrect points. Finally, it is important to remember that essays are not intended to test
typing ability, so the time you allocated for essay response is adequate to complete the
questions even if you do not have the best typing skills.
continued
The essays
Answering multiple-choice questions is an effective method to study the material
for both the multiple-choice and essay sections of the exam. They are an excellent
diagnostic tool that will allow you to quickly identify your weak areas. Also, think
about what your answer would be if the question were not multiple-choice. When
reviewing the correct and incorrect answer explanations, your "essay answers"
should be somewhat equivalent to the detailed answer explanations.
Prepping for the exam
Decide if you will be using one of the approved financial calculators on the exam?
Focus on what you dont know
Realize that you will be more proficient in some topics more than others
Read, quiz, evaluate (what you dont know), sit for lecture, re-quiz, identify
anything you need help with one on one?
Practice the Essay questions use the Gleim Essay Wizard
Mid-way through the course, create a short mock multiple choice exams (say no
more than 50 questions) to condition for the longer 100 question exam.
Right after our cram session take the Gleim online CMA Practice Exam that came
with your Gleim study material. It is a 4 hour exam.
Contact instructor and review anything not quite clear.
Ethics tested on the Exams
Ethics is tested from:
Individual Perspective Part 1
Organizational Perspective Part 2
Questions could be either Multiple Choice or Essay
Make sure you study the IMA Framework on Ethics, ref. the IMA website, or following
URL:
http://www.imanet.org/PDFs/Public/Press_Releases/STATEMENT%20OF%20ETHICAL%20PROFESSIONAL%
20PRACTICE_2.2.12.pdf
Have it conceptually memorized.

You will then be able to answer any question from there
Stay within an objective view, and dont get side-tracked in emotional distractors
SU 1.1 - Concepts in Financial Accounting
Objective of General-Purpose Reporting
Usefulness in decision making
Information relates to economic resources and claims (Statement of Financial
Positions) & changes in those (Income Statement)
Used for evaluating
Liquidity
Solvency
Financial needs
Obtaining financing
Users need to differentiate between changes from:
Performance (Income Statement)
Which helps evaluate determine
Return on economic resources (not just investments)
Management
Future performance
Others like debt and equity (Balance Sheet)
Financial statements must be prepared in conformity to GAAP

CMA also test IFRS knowledge
Financial Accounting vs. Managerial Accounting
Management Accounting:
Used primarily for internal users
Helps management in decision making, planning and control
Can be prospective
Does not have to conform to GAAP
Direct interest users invest or manage the business
Indirect interest users advise, influence, or represent direct interests.
Objective of General-Purpose Reporting
Usefulness in decision making
Information relates to economic resources and claims (Statement of Financial
Positions) & changes in those (Income Statement)
Used for evaluating
Liquidity
Solvency
Financial needs
Obtaining financing
Financial Statements are the primary means of communicating
financial information.
Financial statement notes are there to enhance not make corrections or
improper reporting, but rather amplify
MD&A
Other disclosures
Full set of Financial Statements
Statement of Financial Position (Balance sheet)
Income Statement
Statement of Comprehensive Income
Statement of changes in equity
Statement of Cash Flows
Financial Statement must be:
Relevant
Faithfully represented
Comparable (past and others)
Based on going-concern assumption (1 yr.)
Financial Statement complement each other:
Different aspects of the same transaction
Components of one statement relate to those of others
Net income or loss shown in Retained Earnings
Cash and Cash equivalents from BS reconciled in Statement of Cash Flows
Ending inventory shown on BS and used in COGS of Income Statement
Depreciation shown on BS and also as expense on Income Statement
See appendix A
Accrual vs cash basis accounting
Accrual accounting records the financial effects of transactions and
other events and circumstances when they occur rather than when
their associated cash is paid or received.
For the CMA exam assume that all is on an accrual basis
Revenues are recognized in the period in which they are earned
Accrual
Deferral
Expenses are recognized in the period in which they were
incurred
Accrual
Deferral
Practice question 1
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.
Describe principles and methods peculiar to the industry in which the
C company operates, when these principles and methods are
predominantly followed in that industry.
D Correct an improper presentation in the financial statements.
Practice question 1 answer
Correct Answer: D
Financial statement notes should not be used to correct improper presentations.

The financial statements should be presented correctly on their own. Notes
should be used to explain the methods used to prepare the financial statements
and the amounts shown. The first footnote typically describes significant
accounting policies.
Practice question 2
An entity that sprays chemicals in residences to eliminate or prevent infestation
of insects requires that customers prepay for 3 months service at the beginning
of each new quarter. Select the term that appropriately describes this situation
from the viewpoint of the entity.
A Deferred income.
B Earned income.
C Accrued income.
D Prepaid expense.
Correct Answer: A
The future inflow of economic benefits is not sufficiently certain given that the
entity has not done what is required to be entitled to those benefits. Thus, the
receipt of cash in anticipation of goods to be delivered or services to be
performed must be recognized as a liability, usually called deferred (or unearned)
revenue or deferred (or unearned) income.
Practice question 3
The financial statements included in the annual report to the shareholders are
least useful to which one of the following?
A Stockbrokers.
B Bankers preparing to lend money.
C Competing businesses.
D Managers in charge of operating activities.

Correct Answer: D
Accrual-basis amounts used in financial reporting are not useful to managers

making day-to-day operating decisions. The practice of management accounting
fulfills the needs of these users.
SU 1.2 Statement of Financial Position
(Balance Sheet)
Statement of Financial Position, AKA Balance Sheet
Reports the amounts of assets, liabilities, and their relationships at a
moment in time.
Elements include:
Assets resources controlled by the entity, and represent probably
future economic benefits to the entity.
Liabilities present obligations from past events.
Equity residual interest in assets after liabilities are subtracted,
also ref. to as net assets.
continued
(Balance Sheet)
Equity can be affected by operations but also by:
Investment by owners
Distribution to owners
Ref. accounts on page 14

(Balance Sheet)
Assets
Classified as Current and Noncurrent based on whether they will be
converted into cash or sold or consumed within the entities
operating cycle or 1 year, whichever is longer.
Major current asset categories incl.:
Cash and Cash equivalents
Trading, Available-for-sale, and Held-to-maturity securities
Receivables
Inventories
Pre-paid expenses
continued
(Balance Sheet)
Assets
Noncurrent can be classified as:
Investments and funds nonoperating and held > 1 yr.
Property, Plant & Equipment (PP&E) Incl. natural resources
Intangible Assets i.e. patents, goodwill, customer lists
(Balance Sheet)
Liabilities
Classified as Current and Noncurrent based on whether they will
be settled within the entities operating cycle or 1 year (usual),
whichever is longer.
Major current liabilities categories incl.:
Trade payables
Other payables
Unearned revenues
Other obligations
continued
(Balance Sheet)
Liabilities
Current liabilities do not include short-term debt if:
Intent to refinance on noncurrent basis
Demonstrates the ability to do so by entering into refinancing agreement
Noncurrent liabilities include:
Noncurrent notes and bonds
Liabilities under capital leases
Most postretirement benefit obligations
Deferred tax liabilities arising from interperiod tax allocations
Product or service warranty agreements
Advances
Deferred revenues
(Balance Sheet)
Equity
Any transaction that does not have equal and offsetting effects
on total assets and total liabilities.
Major categories include:
Capital contributions by owners
Retained earnings
Treasury stock
Accumulated other comprehensive income
(Balance Sheet)
Other Balance Sheet
Accounts on BS are Permanent Accounts or Nominal
BS accounts may vary significantly days before and after publication
Based on historical cost
Major Note Disclosures
Describe significant accounting policies (estimates and revenue recognition
basis)
Include items re.:
Investment securities
Property, plant and equipment
Pending litigation
Capital Stock details
(Balance Sheet) Practice Question 1
A statement of financial position allows investors to assess all of the following except
the
A Efficiency with which enterprise assets are used.
B Liquidity and financial flexibility of the enterprise.
C Capital structure of the enterprise.
D Net realizable value of enterprise assets.

(Balance Sheet) Practice Question 1 Answer
Correct Answer: D
Assets are usually measured at original historical cost in a statement of financial

position, although some exceptions exist. For example, some short-term
receivables are reported at their net realizable value. Thus, the statement of
financial position cannot be relied upon to assess NRV.
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 Classified as a current liability on the statement of financial position at December 31, Year 1.
B Classified as a long-term liability on the statement of financial position at December 31, Year 1.
C Retired as of December 31, Year 1.
D Considered off-balance-sheet debt.

Correct Answer: B
Short-term obligations expected to be refinanced should be reported as current

liabilities unless the firm both plans to refinance and has the ability to refinance
the debt on a long-term basis. The ability to refinance on a long-term basis is
evidenced by a post-balance-sheet date issuance of long-term debt or a financing
arrangement that will clearly permit long-term refinancing.
A company has outstanding accounts payable of $30,000 and a short-term construction
loan in the amount of $100,000 at year end. The loan was refinanced through issuance of
long-term bonds after year end but before issuance of financial statements. How should
these liabilities be recorded in the balance sheet?
A Noncurrent liabilities of $130,000.
B Current liabilities of $130,000.
C Current liabilities of $30,000, noncurrent liabilities of $100,000.
Current liabilities of $130,000, with required footnote disclosure of the refinancing of

D
the loan.
Correct Answer: C
Accounts payable are properly classified as current liabilities because they are for
items entering into the operating cycle. Short-term debt that is refinanced by a
post-balance-sheet-date issuance of long-term debt should be classified as
noncurrent. (The ability to refinance on a long-term basis has been demonstrated.)
Thus, the short-term construction loan is classified as noncurrent. Accordingly, the
entity records current liabilities of $30,000 and noncurrent liabilities of $100,000.
SU 1.3 Income Statement
and Statement of Comprehensive Income
Income Statement Elements
Income Statement reports results over a period of time
Revenues Inflows or other enhancements of assets or settlements of liabilities
(or both) from delivering goods and/or providing services from operations.
Gains Increases in equity (or net assets) other than from revenues or
investments by owners.
Expenses Outflows or other usage of assets or incurrences of liabilities (or
both) from delivering or producing goods and/or services from operations.
Losses Decreases in equity (or net assets) other than from expenses or
distributions to owners.
continued
Income Statement Elements
Income = net change in equity except:
Transactions with owners
Prior-period adjustments
Items reported in Other Comprehensive Income (OCI)
Transfers to and from appropriated retained earnings
Accounts are temporary or nominal

Typical Items of Cost and Expense
Accrual based accounting attempts to match income with the
expenses that were incurred because of them, i.e. COGS is recognized
in the same period as the revenue from the sale of the goods.
SG & A Selling, General and Administrative are incurred for the benefit
of the organization and therefore also recognized in the period incurred
(Period Cost vs. Product Cost). They can be both variable and fixed.
Some expenses are recognized because of the passage of time, i.e.
interest, insurance.
Income Statement Formats
Single-step income statement
Multi-step income statement
Irregular Items
Discontinued Operations
Income/Loss from operations is classified as held for sale from the
first day of the reporting period until the date of disposal
Gain/Loss on the disposal of other assets, such PP&E, etc.
continued
Irregular Items
Extraordinary items
Unusual in nature and
Infrequent in occurrence (in the environment in which the entity
operates)
Limitations
Some items are shown on OCI and not on the Income Statement
Accrual base Income Statement does not identify liquidity
Statement of Comprehensive Income
Includes all changes in equity except investments and distributions by/to
owners
Net Income
Other Comprehensive Income
SU 1.3 Income Statement and Statement of
Comprehensive Income Practice Question 1
When reporting extraordinary items,
Each item (net of tax) is presented on the face of the income

A
statement separately as a component of net income for the period.
B Each item is presented exclusive of any related income tax.
Each item is presented as an unusual item within income from

C
continuing operations.
All extraordinary gains or losses that occur in a period are
D summarized as total gains and total losses, then offset to present the
net extraordinary gain or loss.
Comprehensive Income Practice Question 1 Answer
Correct Answer: A
Extraordinary items are reported net of tax after discontinued operations.
Incorrect Answers:
B Extraordinary items are to be reported net of the related tax effect.
Extraordinary items are not reported in the continuing operations section of the
C
income statement.
D Each extraordinary item is to be reported separately.
Which one of the following items is included in the determination of income from
continuing operations?
A Discontinued operations.
B Extraordinary loss.
C Cumulative effect of a change in an accounting principle.
D Unusual loss from a write-down of inventory.

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

but not on a single-step income statement?
A Loss from discontinued operations.
B Gross profit.
C Extraordinary gain.
D Net income from continuing operations.

Correct Answer: B
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.
Incorrect Answers:
Loss from discontinued operations is shown on both a multiple-step and a single-step income
A
statement.
C Extraordinary gain is shown on both a multiple-step and a single-step income statement.
Net income from continuing operations is shown on both a multiple-step and a single-step income
D
statement.
SU 1.4 Statement of Changes in Equity
and Equity Transactions
Statement of Changes in Equity
Presents a reconciliation of changes in equity for the accounting period.
Each change shown separately
Net Income
Distributions
Increases of Common Stock (CS)
Total change in Other Comprehensive Income (OCI)
See example on page 21

Statement of Retained Earnings
Reconciles Retained Earnings (RE) for the period
See format on page 21
Prior period adjustments include

Cumulative effects in accounting principles
Corrections of prior financial statements
Beginning balance of Retained Earnings is adjusted
continued
Appropriated for special purposes including:
Compliance with bond indenture (bond contract)
Retention of assets of internally financed expansion
Anticipated losses
Legal restrictions
Only limits availability of dividends

Common and Preferred Stock
Authorized
Issued
Outstanding
Common Stockholders
Vote
Select Board of Directors (BOD)
Liquidating Distributions (last in line)
Preemptive Rights
Continued
Preferred Stock Hybrid, but still considered an equity instrument
Dividends are not considered an obligation
No voting rights
Features include:
Cumulative
Convertible
Participating
See transaction types on page 23

and Equity Transactions Practice Question 1
Items reported as prior-period adjustments
Do not include the effect of a mistake in the application of accounting principles, as this
A is accounted for as a change in accounting principle rather than as a prior-period
adjustment.
B Do not affect the presentation of prior-period comparative financial statements.
C Do not require further disclosure in the body of the financial statements.
Are reflected as adjustments of the opening balance of the retained earnings of the
D
earliest period presented.
SU 1.4 Statement of Changes in Equity and
Equity Transactions Practice Question 1 Answer
Correct Answer: D
Prior-period adjustments are made for the correction of errors. According to SFAS 16, Prior Period
Adjustments, the effects of errors on prior-period financial statements are reported as adjustments to
beginning retained earnings for the earliest period presented in the retained earnings statement. Such
errors do not affect the income statement for the current period.
Incorrect Answers:
A accounting errors of any type are corrected by a prior-period adjustment.
a prior-period adjustment will affect the presentation of prior-period comparative financial
B
statements.
prior-period adjustments should be fully disclosed in the notes or elsewhere in the financial
C
statements.
An appropriation of retained earnings by the board of directors of a corporation for
bonded indebtedness will result in
A The establishment of a sinking fund to retire bonds when they mature.

A decrease in cash on the balance sheet with an equal increase in the investment and
B
funds section of the balance sheet.
C A decrease in the total amount of retained earnings presented on the balance sheet.
The disclosure that management does not intend to distribute assets, in the form of
D
dividends, equal to the amount of the appropriation.
Correct Answer: D
The appropriation of retained earnings is a transfer from one retained earnings account to another.
The only practical effect is to decrease the amount of retained earnings available for dividends. An
appropriation of retained earnings is purely for disclosure purposes.
Incorrect Answers:
A The establishment of a sinking fund is entirely independent of appropriating retained earnings.
B Cash is unaffected.
The total retained earnings will not change; however, the total will appear as the sum of two
C
retained earnings accounts instead of one.
When treasury stock is accounted for at cost, the cost is reported on the balance sheet as
a(n)
A Asset.
B Reduction of retained earnings.
C Reduction of additional paid-in-capital.
D Unallocated reduction of equity.

Correct Answer: D
Treasury stock is a corporations own stock that has been reacquired but not retired. In the balance
sheet, treasury stock recorded at cost is subtracted from the total of the capital stock balances,
additional paid-in capital, retained earnings, and accumulated other comprehensive income.
Incorrect Answers:
A Treasury stock is not an asset. A corporation cannot own itself.
B Treasury stock accounted for at cost is subtracted from the total of the other equity accounts.
C Treasury stock accounted for at cost is subtracted from the total of the other equity accounts.
SU 1.5 Statement of Cash Flows
Purpose Provide relevant information about the cash receipts and cash
payments of an entity during the period. It helps assess the entitys ability to
generate positive future net cash flows (liquidity), meet obligations
(solvency) and its financial flexibility.
Three sections:
Cash flow from Operations
Cash flow from Investing
Cash flow from Financing
continued
Cash flow from Operations everything that is not financing or
investing activities. Usually changes to Balance Sheet current
items, and adjusting for certain accruals and deferrals (non-cash,
i.e. depreciation expense).
There are two methods Direct and Indirect method, of
which you need to know the indirect method for the exam.
Under the indirect method of presenting the statement of cash
flows, the presentation of this statement begins with net income
or loss, with subsequent additions to or deductions from that
amount for non-cash revenue and expense items, resulting in net
income provided by operating activities.
continued
Cash flow from Investing Activities An item on the
cash flow statement belongs in the investing activities
section if it results from any gains (or losses) from
investments in financial markets and operating
subsidiaries. An investing activity refers to cash spent on
investments in capital assets such as plant and equipment,
which is collectively referred to as capital expenditure, or
capex.
continued
Cash flow from Investing Activities
Examples of Inflows:
Proceeds from disposal of property, plant and equipment
Cash receipts from disposal of debt instruments of other entities
Receipts from sale of equity instruments of other entities
Examples of Outflows:
Payments for acquisition of property, plant and equipment
Payments for purchase of debt instruments of other entities
Payments for purchase of equity instruments of other entities
Sales/maturities of investments
Includes purchasing and selling long- term assets and other
investments.
continued
Cash flow from Financing Activities - external activities that allow
a firm to raise capital and repay investors, such as issuing cash dividends,
adding or changing loans or issuing more stock. Cash flow from financing
activities shows investors the companys financial strength. A company
that frequently turns to new debt or equity for cash, for example, could
have problems if the capital markets become less liquid.
Items included:
Sale of stock (positive cash flow)
Repurchase of company stock (negative cash flow)
Issuance of debt, such as bonds (positive cash flow)
Repayment of debt (negative cash flow)
Payment of dividends (negative cash flow)
continued
Noncash Investing and Financing Activities Anything that affect assets or
liabilities but not cash flows must be disclosed in the notes.
Include:
Conversion of debt to equity
Acquisition of assets via debt
Exchange of a noncash or liability for another
Any paper for paper transaction
See example on page 28

Practice question 1
When preparing the statement of cash flows, companies are required to report separately
as operating cash flows all of the following except
A Interest received on investments in bonds.
B Interest paid on the companys bonds.
C Cash collected from customers.
D Cash dividends paid on the companys stock.

Correct Answer: D
In general, the cash flows from transactions and other events that enter into the determination of
income are to be classified as operating. Cash receipts from sales of goods and services, from interest
on loans, and from dividends on equity securities are from operating activities. Cash payments to
suppliers for inventory; to employees for wages; to other suppliers and employees for other goods
and services; to governments for taxes, duties, fines, and fees; and to lenders for interest are also
from operating activities. However, distributions to owners (cash dividends on a companys own stock)
are cash flows from financing, not operating, activities.
Incorrect Answers:
A Interest received from investments is an operating cash flow.
B Interest paid on bonds is an operating cash flow.
C Customer collections is an operating cash flow.
Practice question 2
A statement of cash flows is intended to help users of financial statements
A Evaluate a firms liquidity, solvency, and financial flexibility.
B Evaluate a firms economic resources and obligations.
C Determine a firms components of income from operations.
D Determine whether insiders have sold or purchased the firms stock.

Correct Answer: A
The primary purpose of a statement of cash flows is to provide information about the cash receipts
and payments of an entity during a period. If used with information in the other financial statements,
the statement of cash flows should help users to assess the entitys ability to generate positive future
net cash flows (liquidity), its ability to meet obligations (solvency) and pay dividends, the need for
external financing, the reasons for differences between income and cash receipts and payments, and
the cash and noncash aspects of the investing and financing activities.
Incorrect Answers:
B The statement of cash flows deals with only one resource: cash.
C The income statement shows the components of income from operations.
D The identity of stock buyers and sellers is not shown.
Practice question 3
Depreciation expense is added to net income under the indirect method of preparing a
statement of cash flows in order to
A Report all assets at gross carrying amount.
B Ensure depreciation has been properly reported.
C Reverse noncash charges deducted from net income.
D Calculate net carrying amount.

Correct Answer: C
The indirect method begins with net income and then removes the effects of past deferrals of
operating cash receipts and payments, accruals of expected future operating cash receipts and
payments, and net income items not affecting operating cash flows (e.g., depreciation).
Incorrect Answers:
A Assets other than cash are not shown on the statement of cash flows.
Depreciation is recorded on the income statement. On the statement of cash flows, depreciation is
B
added back to net income because it was previously deducted on the income statement.
D Net carrying amount of assets is reported on the balance sheet, not the statement of cash flows.
SU 1.6 Revenue Recognition
After Delivery
Revenues and gains should be recognized when:
Realized or realizable Goods and/or services have been exchanged
for cash or claims to cash. They are realizable when exchanged for
assets (other than cash) that are readily convertible to cash or claims to
cash.
And earned when earnings process has been substantially completed.
Read IFRS difference on page 30

After Delivery
Installment Method only acceptable when:
Receivables are collectible over an extended period, and
No reasonable basis exists for estimating collectability
Recognizes partial profit (gross profit) on each installment
Cost-Recover Method Same as Installment Method, except:

No profit recognized until collections exceed the cost of the item sold.
Everything thereafter is recognized as revenues.
continued
After Delivery
Deposit Method The deposit method is used when a company
receives cash before transfer of ownership occurs. Revenue is not
recognized when cash is received because the risks and rewards of
ownership have not transferred to the buyer. The seller records the cash
deposit as a deferred revenue, which is reported as a liability on
the balance sheet until the revenue is earned.
Before Delivery
Completed Contract Method Used when Percentage-of-Completion is
inappropriate.
Defers contract cost until project is completed.
Revenue and gross profit recognized when project completed.

Before Delivery
Percentage-of-Completion Method - work-in-progress evaluation (and billings) for
recording long-term contracts, used wherein the revenues are determined based on
the costs incurred so far. The percentage of completion method is used when:
Collections are assured
The accounting system can:
Estimate profitability
Measure progress toward completion.
Losses are recognized in the year when they are discovered, the same way as
for the completed contract method. The balance sheet presentation is the
same as in the completed contract method.
After Delivery Practice question 1
ABC operates a catering service that specializes in business luncheons for large corporations. ABC
requires customers to place their orders 2 weeks in advance of the scheduled events. ABC bills its
customers on the 10th day of the month following the date of service and requires that payment be
made within 30 days of the billing date. Conceptually, ABC should recognize revenue from its
catering services at the date when a
A Customer places an order.
B Luncheon is served.
C Billing is mailed.
D Customers payment is received.

After Delivery Practice question 1 Answer
Correct Answer: B
Revenues should be recognized when (1) realized or realizable and (2) earned. The most common
time at which these two conditions are met is when goods are delivered or services are rendered.
Incorrect Answers:
A The certainty and measurability criteria are not met when the customer places an order.
The date for billing is a matter of administrative procedure and convenience. The revenue should
C
be recognized at the date the service was performed.
The revenue should be recognized at the point of performance of the service. To wait until the
receivable is collected is to ignore the accrual basis of accounting, which is identified in the
D
Framework for the Preparation and Presentation of Financial Statements as an underlying
assumption of financial accounting.
Before Delivery Practice question 1
During Year 1, Tidal Co. began construction on a project scheduled for completion in Year 3. At
December 31, Year 1, an overall loss was anticipated at contract completion. What would be
the effect of the project on Year 1 operating income under the percentage-of-completion
method and the completed-contract method?
Percentage-of-Completion Completed Contract
A No Effect No Effect
B No Effect Decrease
C Decrease No Effect
D Decrease Decrease
Before Delivery Practice question 2 Answer
Correct Answer: D
When the current estimate of total contract costs indicates a loss, an immediate provision
for the entire loss should be made regardless of method. Thus, under either method, Year
1 operating income is decreased by the projected loss.
Incorrect Answers:
A Under either method, Year 1 operating income is decreased by the projected loss.
Under the percentage-of-completion method, Year 1 operating income is decreased by
B
the projected loss.
Under the completed-contract method, Year 1 operating income is decreased by the
C
projected loss.
Before Delivery Practice question 2
A company began work on a long-term construction contract in Year 1. The contract
price was $3,000,000. Year-end information related to the contract is as follows:
Year 1 Year 2 Year 3
Estimated total cost 2,000,000 2,000,000 2,000,000
Cost incurred 700,000 900,000 400,000
Billings 800,000 1,200,000 1,000,000

Collections 600,000 1,200,000 1,200,000
Under the percentage-of-completion method, the gross profit to be recognized in Year 1 is
SU 1.7 Revenue Recognition Before
Delivery Practice question 2 continued
Under the percentage-of-completion method, the gross profit to be recognized in

Year 1 is
A A $(100,000)
B B $100,000
C C $200,000
D D $350,000
SU 1.7 Revenue Recognition Before
Delivery Practice question 2 answer
Correct Answer: D
The percentage-of-completion method recognizes revenue based on the stage of completion of the
contract. One typical method for estimating the stage of completion is the calculation of ratio of the
contract costs incurred to date to the estimated total costs. The percentage-of-completion at year-end
on the cost-to-cost basis is 35% ($700,000 $2,000,000). The gross profit for Year 1 is the anticipated
gross profit on the contract times the completion percentage. Thus, profit for Year 1 is $350,000
[($3,000,000 $2,000,000) 35%].
Incorrect Answers:
A The difference between costs incurred and collections is $(100,000).
B The difference between billings and costs incurred is $100,000.
C The difference between billings and collections is $200,000.

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Part 1

Become a Member! Preferably of a local chapter (there are

1 hr - 2 Essay questions with up to 8 sub-parts

1. Misreading the requirement (stem) Read the question first

Have it conceptually memorized.

Financial statements must be prepared in conformity to GAAP

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

B Bankers preparing to lend money.

D Managers in charge of operating activities.

Accrual-basis amounts used in financial reporting are not useful to managers

Ref. accounts on page 14

A Efficiency with which enterprise assets are used.

B Liquidity and financial flexibility of the enterprise.

C Capital structure of the enterprise.

D Net realizable value of enterprise assets.

Assets are usually measured at original historical cost in a statement of financial

C Retired as of December 31, Year 1.

D Considered off-balance-sheet debt.

Short-term obligations expected to be refinanced should be reported as current

B Current liabilities of $130,000.

C Current liabilities of $30,000, noncurrent liabilities of $100,000.

Current liabilities of $130,000, with required footnote disclosure of the refinancing of

Accounts are temporary or nominal

When reporting extraordinary items,

Each item (net of tax) is presented on the face of the income

Each item is presented as an unusual item within income from

C Cumulative effect of a change in an accounting principle.

D Unusual loss from a write-down of inventory.

Which one of the following would be shown on a multiple-step income statement

A Loss from discontinued operations.

D Net income from continuing operations.

See example on page 21

See format on page 21

Prior period adjustments include

Only limits availability of dividends

See transaction types on page 23

C Do not require further disclosure in the body of the financial statements.

A The establishment of a sinking fund to retire bonds when they mature.

B Reduction of retained earnings.

C Reduction of additional paid-in-capital.

D Unallocated reduction of equity.

See example on page 28

A Interest received on investments in bonds.

B Interest paid on the companys bonds.

C Cash collected from customers.

D Cash dividends paid on the companys stock.

A statement of cash flows is intended to help users of financial statements

A Evaluate a firms liquidity, solvency, and financial flexibility.

B Evaluate a firms economic resources and obligations.

C Determine a firms components of income from operations.

D Determine whether insiders have sold or purchased the firms stock.

A Report all assets at gross carrying amount.

B Ensure depreciation has been properly reported.

C Reverse noncash charges deducted from net income.

D Calculate net carrying amount.

Read IFRS difference on page 30

Cost-Recover Method Same as Installment Method, except:

Revenue and gross profit recognized when project completed.

A Customer places an order.

D Customers payment is received.

Percentage-of-Completion Completed Contract

Year 1 Year 2 Year 3

Estimated total cost 2,000,000 2,000,000 2,000,000