**25 US CMA Part 1 MCQs on Financial Reporting Topics** ANSWERS
These multiple-choice questions focus on US CMA exam-style topics like income statements, dividends, stock events, cash flows, investments, ratios, accounting concepts, and more, drawing from US GAAP principles tested in Part 1 Section A.
### Income Statement & Equity Events
1. In a multi-step income statement, gross profit is calculated as:
A. Net sales minus operating expenses
B. Net sales minus cost of goods sold
C. Operating income minus taxes
D. Net income plus interest
**Answer: B** – Gross profit reflects sales less direct production costs.
2. A small stock dividend (under 20-25%) is recorded by debiting retained earnings at:
B. Fair market value of shares
D. Zero impact on equity
**Answer: B** – Small stock dividends use fair value to reclassify from retained earnings to paid-in capital.
3. For a 2-for-1 stock split on $80/share stock paying $1 dividend, post-split price expectation if dividend stays $1:
A. Exactly $40
B. Above $40 if yield rises
C. Below $40
D. Unchanged at $80
**Answer: B** – Splits increase shares; unchanged dividend raises yield, potentially lifting price above $40
4. Preferred dividends are typically:
A. Variable like common dividends
B. Fixed percentage of par value
C. Paid after common dividends
D. Non-cumulative by default
**Answer: B** – Preferred stock has fixed dividend rates based on par, with priority over common.
5. A property dividend declares asset with book value $50, fair value $75 at declaration:
A. No gain/loss recognized
B. Gain of $25 recorded
C. Loss of $25 recorded
D. Fair value at distribution date
**Answer: B** – Property is remeasured to fair value at declaration, recognizing gain.
### Cash Flow Statement
6. A statement of cash flows helps evaluate a firm's:
A. Economic resources and obligations
B. Liquidity, solvency, financial flexibility
C. Insider stock trades
D. Operating income components
**Answer: B** – Cash flows assess cash generation for short- and long-term viability
7. Gain on sale of available-for-sale (AFS) securities is:
A. Added to net income in operating cash flows
B. Subtracted from net income in operating section
C. Included in investing inflows
D. Ignored in cash flow statement
**Answer: B** – Gains are in net income but non-operating; subtract to avoid double-counting investing inflow.
8. Cash flows from financing activities include:
A. Cash from customers
B. Proceeds from issuing shares or loans
C. Purchase of equipment
D. Collections of receivables
**Answer: B** – Financing covers equity/debt issuance, repayments, dividends.
9. Decrease in accounts receivable is:
A. Subtracted in operating cash flows (indirect)
B. Added in operating cash flows
C. Investing outflow
D. Financing inflow
**Answer: B** – Indicates cash collected beyond sales revenue.
10. Past period bad debt recovery in current year (direct method):
A. Operating inflow
B. Investing inflow
C. Financing inflow
D. Off the cash flow statement
**Answer: A** – Recovery is cash from operations.
### Investments & Losses
11. AFS investments are reported at:
A. Amortized cost
B. Fair value; unrealized gains/losses in OCI
C. Lower of cost or market
D. Historical cost only
**Answer: B** – Not trading or held-to-maturity; fair value with OCI impact.
12. Allowance for credit losses uses:
A. Direct write-off only
B. Percentage of sales or receivables aging
C. Historical cost adjustment
D. Cash basis estimation
**Answer: B** – Matches expected losses to revenues or receivables.
### Liquidity, Solvency, Leverage
13. Current ratio formula:
A. Cash / Current liabilities
B. Current assets / Current liabilities
C. (Current assets - Inventory) / Current liabilities
D. Operating cash flow / Current liabilities
**Answer: B** – Measures short-term liquidity.
14. Cash flow ratio assesses:
A. Solvency via operating cash / current liabilities
B. Leverage via debt/equity
C. Activity via inventory turns
D. Profitability via ROE
**Answer: A** – Operating cash coverage of short-term obligations.
15. Solvency best represented by:
A. Cash balance end of period
B. Operating cash flows
C. Investing cash flows
D. Financing cash flows
**Answer: B** – Internal generation shows long-term viability over borrowing.
### Concepts & Components
16. Accrual concept records expenses when:
A. Cash paid
B. Incurred, not necessarily paid
C. Profit is high
D. Tax due
**Answer: B** – Matches revenues and expenses in period earned/incurred.
17. Going concern assumption justifies:
A. Liquidation basis
B. Depreciation and current/noncurrent classification
C. Fair value for all assets
D. No asset impairments
**Answer: B** – Assumes continuity beyond year.
18. Historical cost concept uses:
A. Fair value at reporting
B. Original transaction cost
C. Inflated replacement cost
D. Future estimated value
**Answer: B** – Objective, verifiable basis.
19. Cash equivalents include:
A. Long-term investments
B. Highly liquid investments maturing within 3 months
C. Inventory
D. Accounts receivable
**Answer: B** – Short-term, low-risk holdings.
20. Capital maintenance (financial):
A. Physical capacity preserved
B. Nominal capital not reduced by distributions
C. Real purchasing power maintained
D. Residual equity focus
**Answer: B** – Profits available after maintaining invested capital.
### Advanced & Mixed
21. Principal-agent problem in separate entity concept:
A. Owners manage operations
B. Managers (agents) act for owners (principals)
C. No separation of firm and owners
D. Consolidated reporting only
**Answer: B** – Agency theory addresses conflicts.
22. Recovery of prior bad debt:
A. Credit to allowance, debit cash; no P&L
B. Income in current year
C. Balance sheet only
D. Off-balance sheet
**Answer: A** – Reverses prior allowance; excess as income if applicable.
23. Components of cash & equivalents exclude:
A. Treasury bills <90 days
B. Commercial paper
C. Equity investments
D. Money market funds
**Answer: C** – Equity is not cash-like.
24. Leverage ratio example:
A. Current ratio
B. Debt-to-equity
C. Inventory turnover
D. Gross margin
**Answer: B** – Measures debt financing vs. equity.
25. Residual capital maintenance:
A. Physical assets at original cost
B. Distributions from residual equity after maintenance
C. Nominal dividends only
D. No distributions allowed
**Answer: B** – Profits beyond capital recovery.
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