CMA Part 1

External Financial Reporting Decisions

1. Long-term debt should be included in the current section of the financial position if
a. It is to be converted into common stocks before maturity.
b. It matures within the year and will be retired through the use of current assets.
c. Management plans to refinance it within the year.
d. A bond retirement fund has been set up for use in its scheduled retirement during the next year.
2. A statement of financial position provides a basis for all of the following except
a. Computing rates of return.
b. Evaluating capital structure.
c. Assessing liquidity and financial flexibility.
d. Determining profitability and assessing past performance for a specific period.
3. The financial statement that provides a summary of the firm’s operations for a period of time is the
a. Income statement.
b. Statement of financial position.
c. Statement of shareholder’s equity.
d. Statement of retained earnings.
4. Dividends paid to company shareholders would be shown on the statement of cash flows as
a. Operating cash inflows.
b. Operating cash outflows.
c. Cash flows from investing activities.
d. Cash flows from financing activities.
5. The presentation of the major classes of operating cash receipts (such as receipts from customers) less the
major classes of operating cash disbursements (such as cash paid for merchandise) is best described as the
a. Direct method of calculating net cash provided or used by operating activities.
b. Cash method of determining income in conformity with generally accepted accounting principles.
c. Format of the statement of cash flows.
d. Indirect method of calculating net cash provided or used by operating activities.
6. The most commonly used method for calculating and reporting a company’s net cash flow from operating
activities on its statement of cash flows is the
a. Direct method.
b. Indirect method.
c. Single-step method.
d. Multiple-step method.
7. A statement of cash flows prepared using the indirect method would have cash activities listed in which one of
the following orders?
a. Financing, investing, operating.
b. Investing, financing, operating.
c. Operating, financing, investing.
d. Operating, investing, financing.
8. For the fiscal year just ended, Doran Electronics had the following results.

Net Income 920,000

Depreciation expense 110,000
Increase in accounts payable 45,000
Increase in accounts receivable 73,000
Increase in deferred income tax liability 16,000
 Doran’s net cash flow from operating activities is
a. 928,000
b. 986,000
c. 1,018,000
d. 1,074,000
9. Three years ago, James Company purchased stock in Zebra Inc. at a cost of 100,000. This stock was sold for
150,000 during the current fiscal year. The result of this transaction should be shown in the Investing Activities
Section of James’ statement of cash flow as
a. Zero
b. 50,000
c. 100,000
d. 150,000
10. Helicon accrued a gain from the sale of equipment for cash. The gain should be reported in the statement of
cash flows using the indirect method in:
a. Investment activities as a reduction of the cash inflow from the sale.
b. Investment activities as a cash outflow.
c. Operating activities as a deduction from income.
d. Operating activities as an addition to income.
11. The following information was taken from the accounting records of Johnson Corporation for the year ended
December 31:
Proceeds from issuance of preferred stock 8,000,000
Dividends paid non preferred stock 800,00
Bonds payable converted to common stock 4,000,000
Payment for purchase of machinery 1,000,000
Proceeds from sale of plant building 2,400,000
2% stock dividend on common stock 600,000
Gain on sale of plant building 400,000

The net cash flows from investing and financing activities that should be presented on Johnson’s statement of
cash flows for the year ended December 31 are, respectively:
a. 1,400,000 and 7,200,000
b. 1,400,000 and 7,800,000
c. 1,800,000 and 7,800,000
d. 1,800,000 and 7,200,000
12. Chelny Co. uses the indirect method in its statement of cash flows. The amortization of a patent should be
presented as a(n):
a. Cash flow from investing activity.
b. Cash flow from financing activity.
c. Deduction from net income.
d. Addition to net income.
13. Selected financial information for Kristina Company for the year just ended is shown below.
Net income 2,000,000
Increase in accounts receivable 300,000
Decrease in inventory 100,000
Increase in accounts payable 200,000
Depreciation expense 400,000
Gain on sale of available-for-sale securities 700,000
Cash receivable from the issue of common stock 800,000
Cash paid for dividends 80,000
 Cash paid for the acquisition of land 1,500,000
Cash received from the sale of available-for-sale securities 2,800,000

Assuming the indirect method is used, Kristina’s cash flow from operating activities for the year is
a. 1,700,000
b. 2,000,000
c. 2,400,000
d. 3,100,000
14. Bertram Company had a balance of 100,000 in retained earnings at the beginning of the year and 125,000 at the
end of the year. Net income for this time period was 40,000. Bertram’s statement of financial position indicated
that dividends and a stock dividend were declared. The amount of the stock dividend was 8,000. When
preparing its statement of cash flows for the year, Bertram should show cash paid for dividend as
a. 20,000
b. 15,000
c. 12,000
d. 5,000
15. Kelli Company acquired land by assuming a mortgage for the full acquisition cost. This transaction should be
disclosed on Kelli’s Statement of Cash Flow as a(n)
a. Financing activity.
b. Investing activity.
c. Operating activity.
d. Noncash financing and investing activity.
16. The net income for Hudson Co. was 3 million for the year ended December 31. Additional information is as
follows:
Depreciation on fixed assets 1,500,000
Gain from the cash sale of land 200,000
Increase in accounts payable 300,000
Dividends paid on preferred stock 400,000

The net cash provided by operating activities in the statement of cash flows for the year ended December 31
should be:
a. 4,200,000
b. 4,500,000
c. 4,600,000
d. 4,800,000

On November 15, 20X0, Senger Sewing Machine Corp. purchased a 300,000 U.S. Treasury bond with a maturity
date of January 31, 20X1. On December 31, 20X0, Senger still owned the Treasury bond. The company also had
the following other balances on December 31, 20X0:
Checking account, ABC National Bank 50,000
Money market account, ABC National Bank 100,000
U.S. Treasury bill purchased Nov. 1, 20X0, maturing Feb. 28, 20X0 500,000
Senger treats all highly liquid investments with maturities of three months or less when purchased as cash
equivalents.
17. What amount should Senger report as cash and cash equivalents on its December 31, 20X0 statement of
financial position (balance sheet)?
a. 150,000
b. 650,000
c. 450,000
 d. 950,000
18. On senger’s statement of cash flows for December 31,20X0, how should the U.S. Treasury bond be reported?
a. It should not be included.
b. As a cash outflow from investing activities.
c. As a cash outflow from lending activities.
d. As a part of the cash and cash equivalents ending balance.
19. An accountant with Nasbo Enterprises Inc. has gathered the following information in order to prepare the
statement of cash flows for the current year. Net income of 456,900 includes a deduction of 45,600 for
depreciation expense. The company issued 300,000 of dividends this year and purchased one new building for
275,000. The balance sheets from the current period and prior period included the following balances.
Prior Year Current Year
Accounts receivable, net 56,860 45,300
Accounts payable 12,900 10,745
Inventory 186,700 194,320

Using the indirect method, what is the amount of cash provided by operating activities?
a. 202,500
b. 405,205
c. 504,285
d. 521,405
20. Comprehensive income is best described as
a. Net income excluding extraordinary gains and losses.
b. The change in net assets for the period including by owners and distributions to owners.
c. Total revenue minus expenses.
d. The change in net assets for the period excluding owner transactions.

Recognition, Measurement, Valuation and Disclosure

21. Johnson Company uses the allowance method to account for uncollectible accounts receivable. After recording
the estimate of uncollectible accounts expense for the current year, Johnson decided to write off in the current
year the 10,000 account of a customer who had filed for bankruptcy. What effect does this write-off have on the
company’s net income and total current assets, respectively?
Net Income Total Current Assets
a. Decrease Decrease
b. No effect Decrease
c. Decrease No effect
d. No effect No effect
22. Fidler Company has estimated its bad debt expense by using 1% of net sales. However, the company is
contemplating aging its accounts receivable and using this as a basis for estimating its bad debts, as it is believed
that this will provide better estimate of the uncollectible accounts. The following aging schedule was prepared
as of November 30 of the current year, the end of the fiscal year.
% Estimated
Age of Account Amount To Be Uncollectible
Under 60 days 730,000 1%
61-90 days 40,000 6%
91-120 days 18,000 9%
Over 120 days 72,000 25%
 Net sales for the year were 4,200,000. There is a debit balance of 14,000 in the allowance for uncollectible
accounts made on November 30 of the current year will be for
a. 56,000
b. 43,320
c. 29,320
d. 15,320
23. Based on the industry average, Davis Corporation estimates that its bad debts should average 3% of credit sales.
The balance in the Allowance for Uncollectible Accounts at the beginning of Year 3 was 140,000. During Year 3,
credit sales totaled 10,000,000, accounts of 100,000 were deemed to be uncollectible, and payment was
received on a 20,000 account that had previously been written off as uncollectible. The entry to record bad debt
expense at the end of Year 3 would include a credit to the Allowance for Uncollectible Accounts of
a. 300,000
b. 260,000
c. 240,000
d. 160,000
24. The following information is available for a small retailer:
Beginning Balances:
Accounts Receivable 10,000
Allowance for uncollectible accounts (750)
Accounts Receivable, net 9,250
Transactions during the period:
Credit Sales 60,000
Collections on credit sales 55,000

During the period, Accounts Receivable totaling 1,000 were written off as uncollectible. This brought the balance
in the Allowance account to a debit balance of 250.
Required: Calculate the ending balance in the Allowance account and the amount that is charged to Bad Debt
Expense using the following methods:
a. Percentage of Sales - Assume that 3% of credit sales is the estimated bad debt expense. 1800;1550
b. Percentage of Outstanding Receivables - Assume that 6% of the outstanding receivables are estimated
to be uncollectible. 840;1090
25. Woody Company sold 150,000 of its accounts receivable without recourse. The purchaser assessed a finance
charge of 5%. Woody should record
a. Interest expense of 7,500.
b. A credit to liability on transferred accounts receivable of 150,000.
c. A credit to accounts receivable of 150,000.
d. A debit to cash of 150,000.
26. A firm often factors its accounts receivable. The finance company requires an 8% reserve and charges a 1.5%
commission on the amount of the receivable. The remaining amount to be advanced is further reduced by an
annual interest charge of 16%. What proceeds (rounded to the nearest dollar) will the firm receive from the
finance company at the time a 110,000 account, which is due in 60 days, is turned over to the finance company?
a. 81,950
b. 83,630
c. 96,895
d. 99,550
27. The advantage of the last-in, first-out inventory method is based on the assumption that
a. the most recently incurred costs should be allocated to the cost of goods sold.
b. costs should be charged to revenue in the order in which they are incurred.
c. costs should be charged to cost of goods sold at average cost.
 d. current costs should be based on representative or normal conditions of efficiency and volume of
operations.
28. In a period of rising prices, which one of the following inventory methods usually provides the best matching of
expenses against revenues?
a. Weighted average
b. First-in, first-out
c. Last-in, first-out
d. Specific identification
29. Which one of the following actions would result in a decrease in income?
a. Liquidating last-in, first-out layers of inventory when prices have been increasing.
b. Changing from first-in, first-out to last-in, first-out inventory method when prices are decreasing.
c. Accelerating purchases at the end of the year when using the last-in, first-out inventory method in times
of rising prices.
d. Changing the number of last-in, first-out pools.
30. In periods of rising costs, which one of the following inventory cash flow assumptions will result in higher cost of
sales?
a. First-in, first-out
b. Last-in, first-out
c. Weighted average
d. Moving average
31. The inventory method that will yield the same inventory value and cost of goods sold whether a perpetual or
periodic system is used is
a. average cost
b. first-in, first out.
c. last-in, first-out.
d. either first-in, first-out or last-in, first-out.
32. Holly Company’s inventory is overstated at December 31 of this year. The result will be
a. understated income this year.
b. understated retained earnings this year.
c. understated retained earnings next year.
d. understated income next year.
33. Which one of the following errors will result in the overstatement of net income?
a. Overstatement of beginning inventory
b. Overstatement of ending inventory
c. Overstatement of goodwill amortization
d. Overstatement of bad debt expense

The following information is for the next four questions: Addison Hardware began the month of November
with 150 large brass switch plates on hand at a cost of 4.00 each. These switch plates sell for 7.00 each. The
following schedule presents the sales and purchases of this item during the month of November.
Date of Quantity Unit Units
Transaction Received Cost Sold
November 5 100
November 7 200 4.20
November 9 150
November 11 200 4.40
November 17 220
November 22 250 4.80
November 29 100
34. If Addison uses FIFO inventory pricing, the value of the inventory on November 30 would be:
a. 936
b. 1,012
c. 1,046
d. 1,104
35. If Addison uses weighted average periodic inventory pricing, the gross profit for November will be:
a. 1,482
b. 1,516
c. 1,528
d. 1,574
36. If Addison uses periodic LIFO inventory pricing, the cost of goods sold for November will be:
a. 2,416
b. 2,442
c. 2,474
d. 2,584
37. If Addison uses perpetual LIFO inventory pricing, the value of the inventory at November 30 will be:
a. 936
b. 1,012
c. 1,046
d. 1,076
38.