CMA Exam 1 chapter 1

  1. Statement of financial position is also known as?
    The Balance sheet
  2. what does the Balance Sheet Report?
    reports the amounts of Assets liabilities Equity and their relationships at a point in time
  3. What is the Balance Sheet Capitol equation?
    assets= liabilities + equities
  4. What does the Balance sheet help to assess?
    liquidity ,   financial flexibility and risk
  5. Who contributes to Capital structure?
    Outsiders and insiders
  6. What are amounts contributed by outsiders?
  7. What are amounts contributed by insiders?
  8. What are assets?
    resources controlled by entity as a result of pass events , and represent probable future economic benefits to the entity
  9. What are liabilities?
    Liabilities are present obligations of the entity arising from past events, their settlement is expected to result in an outfall of economic benefits from the entity
  10. What is Equity?
    Equity is the residual interests in the assets of the entity after subtracting all liabilities
  11. What are current Assets?
    Current Asset= expected to be realized in cash or consumed with in the operating cycle or one year (the longer)
  12. What are examples of current Asset Categories?
    Cash, Cash equivalent, held to maturity securities, individual trading available for sale, inventory, receivables, prepaid expenses
  13. What are Non Current Assets?
    Those not qualifying as current assets
  14. What are examples on non-current asset categories?
    investments in funds, property, plant, equipment, intangible assets
  15. What are current Liabilities
    Current Liabilities are expected to be settled or liquidated in the ordinary course of business during the longer of the next year or operating cycle.
  16. What are examples of current liabilities?
    Trade payables, unearned revenues
  17. What are non Current Liabilities?
    Non current liabilities those not current
  18. What are examples of non current liabilities?
    non current Notes, bonds, liabilities under capitol leases, most post retirement, deferred tax liabilities, obligations under service warranty agreements, deferred revenue
  19. What are Major Items of Equity?
    Major items of Equity are Capitol contributed by owners, returned earnings, treasury stock, and accumulated other comprehensive
  20. Where are Assets Liabilities and Equity recorded?
    Assets, liabilities and Equity are recorded in permanent or real accounts their balances at the end of reporting period (balance sheet) are carried forward as the beginning balance on the next reporting sheet.
  21. What is the objective of general purpose financial reporting?
    To report Financial info that is useful in making decisions about providing resources to the reporting entity
  22. Information reported in general purpose financial reporting relates to?
    Economic resources and claims to them, and to changes to the resources and claims.
  23. What does information about resources and claims help to evaluate?
    Helps to evaluate liquidity , solvency, financing needs and the probability of obtaining financing
  24. What must be true of financing statements to make them use for to external parties?
    They must be prepared in conformity with accounting principles that are generally accepted in the U.S (GAAP)
  25. Financial accounting differs from management accounting in what ways?
    Management accounting assists management decision making, planning, and control and is primarily directed to specific internal users and does not have to follow GAAP.
  26. What do users with direct interest in a business do?
    Usually invest in or manage the business
  27. What do users with indirect interest in a business do?
    Advise, influence, or represent users with direct interests
  28. What do external users use Financial statements for?
    To determine whether doing business with the firm would be beneficial
  29. What do internal users use Financial Statements for?
    To make decisions affecting the operations of the business
  30. What information is normally disclosed in the Notes of a statements?
    Essential information needed to understand the financial statement
  31. What is the purpose of financial statements?
    Primary means of communicating financial information to external parties.
  32. What is included in a full set of financial statements?
    Balance sheet, income statement, statement of comprehensive income, statement of changes in equity, and statement of cash flows.
  33. What is the going concerns assumption?
    Entity is assumed to continue operating indefinitely as a result liquidation issues are not important because the assumption is made that the company is not going to be liquidated in the near future
  34. What is accrual accounting
    Records the financial effects transaction and other economic events and circumstance when they occur rather than when their associated cash is paid or received
  35. When is revenue recognized in accrual in accounting?
    the period in which they are earned not in the period in which the cash is received.
  36. When are expenses recognized in accrual accounting?
    In the period they were incurred not when they were paid.
  37. What is the income statement?
    Reports the results of an entities operations over a period of time
  38. What are the elements of an income statements
    Revenue, Gains, expenses, losses
  39. What kind of accounts are the elements of an income statement
    Temporary or nominal accounts. Accounts closed at the end of each accounting period and transferred to real accounts
  40. What are typical items of cost and expense in a income statement
    Cost of goods sold, General and administrative expenses, selling expenses, interest expense
  41. What does cost of goods sold represent?
    the Cost assigned to the products that were sold during the accounting period.
  42. What is the COGS equation for a retailer
    COGS= (beginning inventory + net purchase and freight in)- Ending inventory
  43. What is the COGS equation for a manufacturer?
    COGS= (COGS manufactured + beginning finished goods inventory) - ending finished goods inventory
  44. Why are general and administrative expenses incurred?
    For the benefit of the entity as a whole
  45. What are examples of general and administrative expenses
    accounting, legal and other fees for professional services, officers salaries, insurance, office staff services, miscellaneous supplies, and office occupancy cost.
  46. What are Selling Expenses?
    Expenses occurred in selling or marketing
  47. What are examples of Selling expenses?
    Salaries of Sales reps, rent for sales dept, commissions and traveling expenses, credit and collection costs, (shipping costs)
  48. What are interest expenses?
    recognized based on the passage of time.
  49. What interest method is used for bonds, notes and capital leases?
    Effective interest method
  50. What are the income statement formats commonly used ?
    single step method and multiple step method
  51. What is the single step method income statement format?
    provides one grouping for revenue items and one for expense items. The one step is the one subtraction necessary to arrive at net income
  52. What is the multiple step method income statement format?
    Matches operating revenues and expenses in a section separate from non-operating items.
  53. What is the most common way to present the income statement?
    The condensed format of the multiple step method that includes only the section totals.
  54. How must an entity report a discontinued operation or an extraordinary item?
    In a separate section after income from continuing operations.
  55. How must discontinued operations and extraordinary items be presented
    must be shown net of texts because they are reported after the presentation of income taxes.
  56. When is the term continuing operations used?
    Only when discontinued operations is reported
  57. Under IFRS what items are classified as extraordinary on the statement of comprehensive income or in the notes?
    No Items
  58. How many components can discontinued operations have
  59. What are the two components that discontinued operations may have?
    (1) Income or loss from operations of the component that has been disposed of or is classified as held for sale from the first day of the reporting period until the date of disposal, or the end of the reporting period if it is classified as held for sale. (2). Gain or loss on the disposal of the component.
  60. What two criteria must income statement items meet to be considered Extraordinary item
    unusual in nature and infrequent in occurrence in the environment in which the entity operates.
  61. What if an item meets one of the two Extraordinary item criteria?
    The item should be reported separately as a component of income from continuing operations.
  62. What does comprehensive income include?
    All changes in equity of a business entity during a period except those resulting from investments by and distributions to owners.
  63. What does comprehensive income consist of?
    net income or loss, bottom line of the income statement, and other comprehensive income (OCI)
  64. What items are excluded from net income and included in other comprehensive income (OCI)
    1. effective portion of a gain or loss on a hedging instrument in a cash flow hedge. 2. changes in the fair value of available for sale securities. 3. translation gains and losses for financial statements of foreign operations 4. Certain amounts associated with accounting for defined benefit post retirement obligations.
  65. How are items of comprehensive income recognized for the period?
    One continuous financial statement or in two separate but consecutive statements.
  66. What does a statement of changes in equity present?
    A recon for the accounting period of the beginning balance of each component of equity to the ending balance
  67. How is each change disclosed in the statement of changes in equity
    They are disclosed separate
  68. What are the common changes shown in the statement
    Net income (loss for the period), distribution to owners, issuance of stock, total change in other comprehensive income.
  69. What does a statement of retain earnings do?
    reconciles the beginning and ending balances of the account
  70. Where is the statement of retain earning reported
    As part of the statement of changes in equity in a separate column
  71. What do the changes in retain earnings result from?
    net income or loss for the period, dividends distributed during the period, and positive or negative prior period adjustments
  72. What do prior period adjustments include?
    Cumulative effect of changes in accounting principle and corrections of prior period financial statement errors.
  73. What is retrospective application?
    An adjustment on the beginning balance of the retained earnings for the prior periods cumulative effect on the income statement.
  74. Why are retained earnings some times appropriated or restricted to a special account?
    To disclose that earnings not being paid out in dividends are being used for special purposes, and appropriation must be clearly displayed in equity.
  75. What are the most widely used classification of stock?
    Common and preferred
  76. Who are the common shareholders?
    Owners of the firm, have voting rights, select the firms board of directors, vote on resolution, not entitled to dividends unless so declared by board of director.
  77. What Features does Preferred Stock Have?
    Preferred stock has features of debt and equity
  78. How is preferred stock classified?
    as an Equity instrument and is presented in the equity section of the firms balance sheet.
  79. What happens when stock is distributed?
    Cash is increased (debited) the appropriate stock account is increased (credited) for the total par value of stock issued. Additional paid in capital is increased (credited) for the difference.
  80. What are direct issuance costs of issuing stock?
    underwriting, legal, accounting, tax, registration… etc.
  81. Can direct issuance costs be recognized as an expense?
    no, the net proceeds received and additional paid in capital should be reduced.
  82. How can dividends be distributed?
    Cash or property
  83. Who approves the dividend pay out
    The board of directors on the date of declaration.
  84. What does a declaration of dividend do
    decreases (debits) the retained earnings account
  85. Who is legally entitled to receive a dividend?
    All holders of the stock on the date of record.
  86. How are stock dividends accounted for?
    A reclassification of different equity accounts… not liabilities
  87. What should be recognized as a stock dividend?
    An issuance of shares less than 20 to 25% of the previously outstanding common shares
  88. What should be recognized as a stock split in the form of a dividend
    An issuance of shares greater than 20 to 25% of the previously outstanding common shares
  89. in accounting for a stock dividend what happens to the fair value of the additional shares issued
    They are reclassified from retain earnings to common stock at par value and the difference to paid in capital.
  90. What happens to the Par value of the additional shares issued for a stock dividend that is accounted for as a stock split
    the par value is reclassified from retain earnings to common stock
  91. What are stock splits?
    Issuances of shares that do not effect any aggregate par value of shares issued and outstand or total equity.
  92. What does a stock split do?
    Reduces the par value of each stock and increases the number of shares outstanding.
  93. What is the primary purpose of the Statement of Cash flows?
    Provide relevant information about cash receipts and payment s of an entity during a period
  94. What should the statement of cash flows provide to achieve its purpose?
    the statement should provide information about cash inflows and cash outflows from the operating, investing, and financing activities
  95. What does the Statement of cash flows Explain?
    The statement of cash flows explains the change in cash and cash equivalents during the period. It reconciles the periods beginning balance of cash and cash equivalents with the ending balance.
  96. What are Operating Activities?
    Operating activities are all transactions and other events that are not investing or financing activities.
  97. Where are Cash flows from operating activities derived from?
    Principle revenue producing activities of the entity. They generally result from transactions and other events that enter into the determination of net income.
  98. What do cash inflows from operating activities include?
    cash receipts from the sale of goods and services and from royalties, fees, commissions, and other revenue. Inflows also include cash received as interest or dividends.
  99. What do Cash outflows from operating activities include?
    payments to suppliers for goods and services, to employees and to the government for taxes, duties, fines, and fees.   Outflows also include payments of interest on debt.
  100. What are the two acceptable methods of presentation of cash flows from operating activities?
    the direct and the indirect methods.
  101. What is the only difference between the direct and indirect methods?
    Their presentation of net cash flows from operating activities, {the total cash flow, from operating, investing, and financing activities are the same for both.}   (need to know the indirect for CMA exam.)
  102. What does Investing activities represent?
    the extent to which expenditures have been made for resources and to digenerate future income and cash flows.
  103. What do Cash inflows and outflows related to investing activities involve?
    payment of receipts for property, plant, equipment, and intangible assets, payment or receipts for equity or debt instruments of other entities for investing purposes, and advances or receipts made to other parties.
  104. What do Cash flows from financing activities generally involve?
    the cash effects of transactions and other events that relate to the issuance, settlement, or re acquisition of the entity's debt and equity instruments.
  105. What do Cash inflows relating to financing activities include?
    cash proceeds from issuing shares and other equity instruments, loans, notes, bonds and other short term or long term borrowings.
  106. What do Cash outflows relating to financing activities include?
    cash repayments of amounts borrowed, payments of cash dividends, cash payments to acquire or redeem the entities shares, and cash payments by a leasee for a reduction of the outstanding liability relating to a capital lease.
  107. What must be disclosed in the notes outside the body of the statement of cash flows.
    Information about all investing and financing activities that effect recognized assets or liabilities but not cash flows
  108. Under the indirect method of presenting operating cash flows, the net cash flow from operating activities is determined by adjusting net income of a business for the effects of:
    1. non cash revenue and expenses that were included in net income such as depreciation and amortization expenses, 2. Items included in net income who's cash effects relate to investing or financing cash flows such as gains or losses on sales of PPE items and gains or losses on extinguishment of debt 3. All deferrals of past operating cash flows such as changes in inventory and differed income, 4. All accruals of expected future operating cash flows such as changes during the period in accounts receivable and accounts payable.
  109. Under the direct method of presenting operating cash flows, the entity presents the major classes of actual gross operating cash receipts and payments and their sum or net cash flow from operating activities. An entity using this method must at a minimum report the following:
    1. Cash collected from customers 2. Interest and dividends received 3. Other operating cash receipts if any 4. Cash paid to employees and other suppliers of goods and services 5. interest paid 6. income taxes paid and 7. other operating cash payments if any.
  110. When should Revenue and gains be recognized?
    1. Realized or realizable 2. Earned
  111. When are Revenue and Gains Realized?
    When goods or services have been exchanged for cash or claims to cash.
  112. When are Revenue and Gained Realizable?
    When goods or services have been exchanged for assets that are readily convertible into cash or claims to cash.
  113. When are revenues earned?
    When the earning process as been substantially completed and the entity is entitled to the resulting benefits for revenues.
  114. Under IFRS, what are the 5 conditions that must be met to recognize revenue of a sale of goods?
    1. The entity has transferred the significant and rewards of ownership. 2. The entity has neither continuing managerial involvement to an extent associated with ownership nor a effective control over the goods 3. The revenue can be reliably measured. 4. It is probable the economic benefits will flow to the entity 5. Transaction costs can be reliably measured .
  115. Under IFRS for the rendering of a service; What is the % of Completion method?
    if the outcome can be reliably estimated revenue is recognized based on the stage of completion.
  116. When can the outcome can be reliably estimated
    when 1. Revenue can be reliably measured. 2. It is probable economic benefits will flow to the entity 3. The stage of completion can be reliably measured 4. The cost incurred and the cost to complete can be reliably measured.
  117. When is the installment method is only acceptable?
    when receivables are collectable over an extended period, and no reasonable basis exists for estimating the degree of collectability
  118. What does the installment method do?
    The installment method recognizes a partial profit on a sale as each installment is collected.
  119. When can the cost recovery method may be used?
    only in the same circumstances as the installment method, however no profit is recognized until collections exceed the cost of the items sold. Subsequent receipts are treated entirely as revenues.
  120. When is the deposit method used?
    The Deposit method is used when cash is received but the criteria for a sales have not been met thus the seller continues to account for the property in the same way as an owner. No revenue or profit has been recognized because it has not been earned. which does not occur until the property is transferred.
  121. What are the Two methods used to account for long term construction contracts?
    The completed method and the percentage of completion method.
  122. What is the completed for long term construction contracts?
    defers all contract costs until the project is completed and then matches the costs of completing the contract with the revenues from the project. Thus, the revenue and gross profit from the contract are recognized only in the year of completion. All costs are deferred in a construction and progress account until the project is completed and revenue is recognized.
  123. What is the percentage of completion method for long term construction contracts?
    completion method recognizes revenue or gross profit based upon the estimated total revenue, the percentage completed, and the revenue or gross profit recognized to date.
  124. How is the Percentage of completion calculated?
    The estimated total revenue or gross profit is the total estimated costs subtracted from the contract price. The percentage completed is applied to the total expected revenue or gross profit to determine the total revenue or gross profit be recognized to date. The revenue or gross profit recognized in prior periods is then subtracted from the total to date, to determine the amount to be recognized in the current period.
  125. Under both method used to account for long term construction contracts, when is the estimated loss recognized?
    as soon as an estimated loss becomes apparent, it is recognized in full.
  126. under IFRS, is the completed contract Method used?
    It is not used. When the outcome of a long term construction contract can not be reliably estimated, revenue recognition is limited to recoverable costs incurred.
  127. When are Contract costs recognized?
    Contract costs must be recognized as an expense in the period in which they are incurred.
Card Set
CMA Exam 1 chapter 1
Study guide for chapter 1 of exam 1