CMA Pop Quiz #103: Part 1: Planning, Budgeting, and Forecasting

Here are the answers to this week's quiz:

Question 1
Which of the following (internal) pro forma financial statements is usually the last
budget prepared at the end of a period?
A. Pro forma income statement.
B. Pro forma balance sheet.
C. Pro forma cash budget.
D. Pro forma statement of stockholder's equity.
Correct Answer B.
The pro forma or budgeted balance sheet is based in part on the current period’s budget balance
sheet and in part on the other budgets, so it is usually the last item prepared in a master budget.

Question 2
In developing the budget for the next year, which one of the following approaches
would most likely result in a successful budget with the greatest amount of positive
motivation and goal congruence?

*Source: Retired ICMA CMA Exam Questions.

A. Have senior management develop the overall goals and permit the divisional manager to
determine how these goals will be met.
B. Have the divisional and senior management jointly develop goals and the
divisional manager develop the implementation plan.
C. Have the divisional and senior management jointly develop goals and objectives while
constructing the corporation's overall plan of operation.
D. Permit the divisional manager to develop the goal for the division that in the manager's view
will generate the greatest amount of profits.
Correct Answer B.
Feedback: In any organization, it is important for the divisional and senior management to jointly
develop goals, as it should be assured that these goals meet the strategic goals of the
organization. The implementation plan should be developed by the divisional manager, as the
divisional manager understands the roles of the members of the division and their impact on
working towards the goals of the department.

Question 3
All of the following are part of a capital investment budget except:
A. Factory machine purchase price.
B. Cost of disposing of the old machine being replaced.
C. Installation of the factory machine.
D. Research and development costs.
Correct Answer D.
Research and development costs are period costs that must be expensed in the period incurred
and are therefore not part of a capital budget.

Question 4
Which of the following is the element that if inaccurate will throw off all of the other
master budget elements?
A. Capital budget.
B. Sales forecast.
C. Production forecast.
D. Cash budget.
Correct Answer B.
Without an accurate sales forecast, all other budget elements will be inaccurate because
production levels, purchases, etc., are set to match expected sales.

Question 5
A. ($350,000) and ($750,000).
B. $300,000 and ($100,000).
C. ($350,000) and ($100,000).
D. $300,000 and ($750,000).
Correct Answer B.
The expected value of not investing is ($100,000), since this is the additional cost that would be
incurred if no investment is made.

The expected value of investing can be calculated by adding together the expected value of when
the investment is successful and the expected value of when the investment is unsuccessful and
then subtracting the initial investment cost.

Expected value of investing = (expected value when successful) + (expected value when
unsuccessful) − (initial investment cost)

Expected value of investing = (0.6)($15,000,000) + (0.4)($2,000,000) − $9,500,000

Expected value of investing = $9,000,000 + $800,000 − $9,500,000

Expected value of investing = $300,000

Note that the $650,000 in cost incurred up to this point are sunk costs and are irrelevant to the
analysis.

Willey cmaexcel