CMA Part 1 Textbook Volume 1 May 2024 Section A

Question 1

What is the objective of financial reporting?

Answer 1

The objective of financial reporting is to provide financial information about a company that is useful for making decisions about providing resources to the company.

Question 2

What does IFRS stand for?

Answer 2

IFRS stands for ‘International Financial Reporting Standards,’ a widely accepted set of accounting principles used in many countries around the world.

Question 3

How does IFRS differ from U.S. GAAP?

Answer 3

IFRS is primarily a principles-based set of accounting standards with few practical examples, while U.S. GAAP is largely a rules-based body of standards with extensive interpretive guidance.

Question 4

Who are the users of financial information?

Answer 4

Users of financial information include existing and potential investors, lenders, and other creditors.

Question 5

What do users of financial information assess?

Answer 5

Users need information to help them assess their expectations about returns and the amount, timing, and uncertainty of future net cash inflows to the company.

Question 6

What are direct users of financial information?

Answer 6

Direct users are directly affected by the results of a company, including investors, employees, management, suppliers, and creditors.

Question 7

What are indirect users of financial information?

Answer 7

Indirect users are people or groups who represent direct users, such as financial analysts, advisors, stock markets, and regulatory bodies.

Question 8

What is the relationship between financial statements?

Answer 8

Financial statements articulate with each other, meaning they are interrelated and reflect different aspects of the same transactions or events.

Question 9

What are the elements of financial statements?

Answer 9

The elements of financial statements are assets, liabilities, equity, comprehensive income, investments by owners, and distributions to owners.

Question 10

What is comprehensive income?

Answer 10

Comprehensive income is equal to the change in assets and liabilities other than those resulting from investments by owners and distributions to owners.

Question 11

What is required for an item to be recognized in financial statements?

Answer 11

An item must meet the definition of an element of financial statements, be measurable, and be depicted and measured with faithful representation.

Question 12

What is the balance sheet?

Answer 12

The balance sheet, also called a statement of financial position, provides information about a company’s assets, liabilities, and owners’ equity at a point in time.

Question 13

What does liquidity refer to?

Answer 13

Liquidity refers to the time expected to elapse until an asset is converted into cash or until a liability needs to be paid.

Question 14

What are the elements of the balance sheet?

Answer 14

Elements of the balance sheet include assets, liabilities, stockholders’ equity, investments by owners, and distributions to owners.

Question 15

How are assets and liabilities classified on the balance sheet?

Answer 15

Assets and liabilities are classified as either current or non-current based on the time frame in which they are expected to be realized or settled.

Question 16

What are current assets?

Answer 16

Current assets are cash and other assets expected to be realized in cash or sold or consumed during the normal operating cycle of the business.

Question 17

What does non-current depend on?

Answer 17

Non-current depends on the time frame in which the company expects an asset to be converted into cash or a liability to be settled.

Question 18

What are current assets?

Answer 18

Current assets are cash and other assets or resources that are expected to be realized in cash or sold or consumed during the normal operating cycle of the business.

Question 19

How is the operating cycle defined?

Answer 19

The operating cycle is defined as the average time between the acquisition of materials or services and their final cash realization.

Question 20

What is the classification period for current assets if a company has several operating cycles within a year?

Answer 20

If a company has several operating cycles within a year, one year is to be used as the period for classifying assets as current.

Question 21

What are examples of current assets?

Answer 21

Current assets include cash, cash equivalents, marketable securities, receivables, contract assets, short-term notes receivable, inventories, prepaid expenses, and restricted funds for current purposes.

Question 22

What are non-current assets?

Answer 22

Non-current assets are assets or resources other than those that are expected to be realized in cash or sold or consumed during the normal operating cycle of the business.

Question 23

What are examples of non-current assets?

Answer 23

Non-current assets include restricted cash, marketable securities, long-term investments, property, plant, and equipment, right-of-use assets, intangible long-term assets, net deferred tax assets, and other non-current assets.

Question 24

What are property, plant, and equipment (PP&E)?

Answer 24

PP&E are tangible assets used in operations that will continue to be used beyond the end of the current period.

Question 25

How are intangible assets defined?

Answer 25

Intangible assets do not have physical substance but provide benefit to the company. They may be either purchased or developed internally.

Question 26

What are examples of intangible assets?

Answer 26

Examples of intangible assets include copyrights, patents, goodwill, trademarks, franchises, and leasehold improvements.

Question 27

What are current liabilities?

Answer 27

Current liabilities are obligations that will be settled by using current assets or by creating other current liabilities.

Question 28

What are examples of current liabilities?

Answer 28

Examples of current liabilities include accounts payable, cash dividends payable, contract liabilities, agency collections, short-term notes, and taxes payable.

Question 29

What do current liabilities not include?

Answer 29

Current liabilities do not include debts to be paid by funds in accounts classified as non-current or the portion of a short-term obligation intended to be refinanced by a long-term obligation.

Question 30

What are non-current liabilities?

Answer 30

Non-current liabilities are liabilities that will not be settled within one year or the operating cycle if the operating cycle is longer than one year.

Question 31

What is equity?

Answer 31

Equity is the ownership interest in a business, representing the difference between the company’s assets and its liabilities.

Question 32

What are the categories of owners' equity for corporations?

Answer 32

Owners' equity for corporations is split into capital stock, additional paid-in capital, retained earnings, accumulated other comprehensive income, noncontrolling interest, and treasury stock.

Question 33

What are the benefits of the balance sheet?

Answer 33

The balance sheet provides information on assets, liabilities, and stockholders’ equity, helping to compute rates of return, evaluate capital structure, and predict future cash flows.

Question 34

What are the limitations of the balance sheet?

Answer 34

The balance sheet does not report the company’s true value, as many assets are not reported, values are measured at historical cost, and judgments and estimates are used.

Question 35

What is fair value?

Answer 35

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Question 36

What is the fair value of marketable securities and other assets with active markets?

Answer 36

The fair value is the current market value.

Question 37

How is fair value determined for assets without active markets?

Answer 37

Fair value may be the price for a similar item in an active or inactive market, such as a valuation multiple based on the sale price of comparable assets.

Question 38

What internal assumptions may be used to determine fair value when markets do not exist or are not liquid?

Answer 38

A company's internal assumptions such as forecasts of future cash flows may be used.

Question 39

Do companies have an option to measure financial assets and liabilities at fair value?

Answer 39

Yes, companies have the option to measure most financial assets and liabilities at fair value.

Question 40

What is a covenant in the context of a loan agreement?

Answer 40

A covenant is a condition or requirement that may restrict the actions of the borrower or require that the borrower meet certain financial statement ratios.

Question 41

What happens if a borrower fails to meet the requirements of a loan agreement?

Answer 41

The loan becomes in default, and the full principal and any accrued interest become immediately due and payable.

Question 42

What is an assurance-type warranty?

Answer 42

An assurance-type warranty is a manufacturer's warranty that provides assurance that the product meets agreed-upon specifications at the time of sale.

Question 43

How can treasury stock be accounted for?

Answer 43

Treasury stock can be accounted for under the cost method, the par value method, or the constructive retirement method.

Question 44

What is the cost method of accounting for treasury stock?

Answer 44

Under the cost method, the full amount paid to repurchase the treasury stock is debited to the treasury stock account.

Question 45

What is the par value method of accounting for treasury stock?

Answer 45

Under the par value method, the par value of the repurchased shares is debited to the treasury stock account and the remaining purchase price is debited to the additional paid-in capital account.

Question 46

What is the constructive retirement method of accounting for treasury stock?

Answer 46

Under the constructive retirement method, the par value of the repurchased shares is debited directly to the common stock account and the remaining purchase price is debited to the additional paid-in capital account.