Comprehensive question answers oct25:cma part 1

 

Comprehensive question answers oct25:cma part 1 Here is a comprehensive question interactive mock exam designed specifically to test the core case-based scenarios and principles required for the US CMA Part 1 exam. It spans all key domains: External Financial Reporting Decisions, Planning, Budgeting, and Forecasting, Performance Management, Cost Management, Internal Controls, and Technology and Analytics. 1.A company manufactures heavy equipment and sells a unit on January 1 for $100,000 with a 2-year standard warranty included. Past experience indicates warranty costs average 4% of the sales price. Under US GAAP, how should the company recognize the warranty obligation at the date of sale? A. Recognize a warranty expense of $4,000 and credit cash when actual repairs occur. B. Recognize $4,000 as warranty expense and credit warranty liability in the period of sale. C. Recognize $100,000 in revenue and defer all warranty accounting until year two. D. Record $4,000 as an intangible asset and amortize over 2 years. ANSWER B 2.An entity reclassifies a debt security from available-for-sale (AFS) to trading. Under US GAAP, where should the unrealized holding gain or loss at the date of transfer be recognized? A. Recognized in earnings immediately. B. Recognized in other comprehensive income (OCI). C. Deferred and amortized over the remaining life of the security. D. Ignored until the security is sold to an independent third party. ANSWER A. Recognized in earnings immediately. Correct! Upon transfer from AFS to trading, the unrealized gain or loss is recognized in net income (earnings) at the transfer date. 3.A manufacturing firm uses a normal costing system with overhead applied based on direct labor hours. If actual manufacturing overhead is $150,000 and applied overhead is $142,000, the overhead is: A. Overapplied by $8,000. B. Overapplied by $292,000. C. Underapplied by $8,000. D. Underapplied by $292,000. ANSWER C 4.In a process costing system using the weighted-average method, the calculation of equivalent units of production includes: A. Only units started and completed during the current period. B. Work done in prior periods plus work done in the current period on ending inventory only. C. Work done in the current period only, excluding beginning inventory. D. Units completed and transferred out plus equivalent units in ending work-in-process inventory. ANSWER D 5Q. A company purchases machinery for $100,000 and pays $5,000 for installation. Under US GAAP, what is the initial cost of the machinery? Answer: $105,000, including directly attributable installation costs. Q6. A retailer has inventory costing $80,000 and a net realizable value of $72,000. What amount should be reported if the inventory is measured under the lower-of-cost-and-net-realizable-value rule? Answer: $72,000.   Q7. A company sells goods for $50,000 on credit, and control transfers to the customer on December 28. When should revenue generally be recognized? Answer: In December, when the performance obligation is satisfied and control transfers.   Q8. A company estimates that 2% of its $500,000 credit sales will be uncollectible. What is the estimated bad debt expense? Answer: $10,000, assuming the estimate is based on credit sales.   Q9. A company purchases equipment for $60,000 with a five-year useful life and zero residual value. What is annual straight-line depreciation? Answer: $12,000 per year.   Q10. A company reports a contingent loss that is probable and reasonably estimable at $40,000. What accounting treatment is generally required under US GAAP? Answer: Accrue a $40,000 loss and liability.   Q11. A company receives $24,000 on October 1 for a 12-month service contract. How much revenue should it recognize by December 31 if services are provided evenly? Answer: $6,000.   Q12. A company issues bonds at a discount because the stated interest rate is below the market rate. How is the discount generally treated over the bond's life? Answer: It is amortized as additional interest expense using the effective-interest method.   Q13. A company owns 30% of another company and has significant influence over its operating and financial policies. Which accounting method generally applies? Answer: The equity method.   Q14. A company pays $15,000 for routine equipment maintenance that does not extend useful life or increase capacity. How should it account for the payment? Answer: Recognize the $15,000 as maintenance expense.   Q15. A company reports $200,000 in current assets and $125,000 in current liabilities. What is its working capital? Answer: $75,000.   Q16. A company changes an accounting estimate because new information becomes available about an asset's useful life. How is the change generally reported? Answer: Prospectively in the current and affected future periods.   Section 2: Planning, Budgeting and Forecasting (Questions 13–22) Q17. A company expects to sell 10,000 units and wants ending inventory of 2,000 units; beginning inventory is 1,500 units. How many units should it produce? Answer: 10,500 units (10,000 + 2,000 − 1,500).   Q18. A company expects sales of $400,000, and 70% of sales are collected in the same month. What are current-month collections from these sales? Answer: $280,000.   Q19. A company budgets 5,000 units of production, requiring 3 kilograms of material per unit. How much material is needed for production before inventory adjustments? Answer: 15,000 kilograms.   Q20. A manager deliberately understates expected revenue to make budget targets easier to achieve. What is this behavior called? Answer: Budgetary slack.   Q21. A company updates its budget every month by adding a new month as the previous month ends. What type of budget is this? Answer: A rolling (continuous) budget.   Q22. A business has fixed costs of $60,000 and a contribution margin ratio of 40%. What sales revenue is required to break even? Answer: $150,000 ($60,000 ÷ 40%).   Q23. A company forecasts sales of $500,000 but actual sales are $460,000. What is the sales revenue variance? Answer: $40,000 unfavorable.   Q24. A business has a cash shortage in its budget despite reporting a net profit. What could explain the difference? Answer: Noncash expenses, working-capital increases, capital expenditures, or debt repayments may reduce cash despite accounting profit. Q25. A manufacturer identifies its production capacity as the main constraint on sales. Which budget should be prepared first to reflect the constraint? Answer: The production budget should be developed around the capacity constraint after considering demand.   Q26. A company prepares three forecasts based on optimistic, expected, and pessimistic sales outcomes. Which planning technique is it using? Answer: Scenario analysis.   Section 3: Cost Management and Cost Accounting                                  Q27. A factory incurs $100,000 in fixed costs and produces 20,000 units. What is fixed cost per unit? Answer: $5 per unit.   Q28. Variable cost is $12 per unit, selling price is $20, and fixed costs are $80,000. How many units are needed to break even? Answer: 10,000 units [($80,000) ÷ ($20 − $12)].   Q29. A company has a selling price of $50, variable cost of $30, and fixed costs of $100,000. What is the contribution margin ratio? Answer: 40% [($50 − $30) ÷ $50].   Q30. A company receives a special order for 2,000 units at $18 each. Variable cost is $12 per unit, and there is no additional fixed cost or displacement of regular sales. What is the incremental profit? Answer: $12,000 [(2,000 × ($18 − $12))].   Q31. A company can manufacture a component for $14 per unit, including $4 of allocated fixed overhead. A supplier offers it for $12.50, and the fixed overhead will remain. What is the relevant cost of manufacturing? Answer: $10 per unit, excluding unavoidable fixed overhead.   Q32. A company spends $40,000 on research that has already been completed. Management is deciding whether to launch the resulting product. How should the research expenditure be treated in the decision? Answer: As a sunk cost, which is irrelevant to the future decision.   Q33. A product sells for $100, has variable costs of $60, and uses two machine hours per unit. What is its contribution margin per machine hour? Answer: $20 per machine hour [($100 − $60) ÷ 2].   Q34. A factory applies overhead using machine hours, but one product consumes substantially more setup and inspection activities than another. Which costing method may provide more accurate product costs? Answer: Activity-based costing (ABC).   Q35. A company incurs $200,000 of joint costs before two products become separately identifiable. How should these costs be treated when deciding whether to process one product further? Answer: Joint costs incurred before split-off are sunk for the further-processing decision.   Q36. A company has actual material usage of 5,200 kilograms, standard usage of 5,000 kilograms, and a standard price of $4 per kilogram. What is the direct material usage variance? Answer: $800 unfavorable [(5,200 − 5,000) × $4].   Q37. A company purchases 3,000 kilograms of material at $5.20 per kilogram when the standard price is $5.00. What is the material price variance? Answer: $600 unfavorable [(5.20 − 5.00) × 3,000].   Q38. A worker produces 100 units using 20 labor hours. The standard time is 0.18 hours per unit, and the standard labor rate is $25 per hour. What is the labor efficiency variance? Answer: $50 unfavorable [(20 − 18) × $25].   Q39. A company uses standard costing and finds that actual overhead exceeds applied overhead. What does this indicate before any year-end disposition? Answer: Overhead is underapplied.   Q40. A factory allocates overhead using a predetermined rate of $8 per machine hour and records 12,000 machine hours. How much overhead is applied? Answer: $96,000.   Q41. A company reports beginning work-in-process of 1,000 units, starts 9,000 units, and completes 8,000 units. How many units remain in ending work-in-process? Answer: 2,000 units.   Q42. A manager evaluates a product using only full manufacturing cost, including allocated fixed overhead, even though the decision concerns a short-term special order with unused capacity. What is the main risk? Answer: Rejecting a profitable order because irrelevant allocated fixed costs distort the decision.   Section 4: Performance Management and Measurement                               Q43. A division earns operating income of $150,000 and has average operating assets of $1,000,000. What is its return on investment (ROI)? Answer: 15% ($150,000 ÷ $1,000,000).   Q44. A division earns $200,000 on operating assets of $1,000,000. The minimum required rate of return is 12%. What is residual income? Answer: $80,000 [$200,000 − ($1,000,000 × 12%)].   Q45. A manager's bonus is based solely on quarterly profit, causing the manager to cut employee training and preventive maintenance. What performance measurement problem is illustrated? Answer: Short-termism caused by an overly narrow performance measure.   Q46. A company measures customer satisfaction, employee learning, internal process efficiency, and financial returns. Which framework is it using? Answer: The Balanced Scorecard.   Q47. A company has sales of $800,000 and operating income of $120,000. What is its operating margin? Answer: 15% ($120,000 ÷ $800,000).   Q48. A plant's actual output is 9,000 units, while its budgeted output is 10,000 units. Why should a flexible budget be considered when analyzing variable costs? Answer: It adjusts expected variable costs to actual activity levels, improving the fairness of the comparison.   Q49. A company compares its defect rate with that of a leading competitor to identify improvement opportunities. What is this process called? Answer: Benchmarking.   Q50. A division manager is evaluated on controllable contribution but is charged for corporate headquarters costs the manager cannot influence. What is the problem? Answer: The evaluation includes costs outside the manager's control.   Q51. A company tracks the percentage of products delivered on time. Is this a leading or lagging performance indicator? Answer: Generally a lagging indicator of delivery performance, although it can help predict customer retention.   Q52. A business has sales of $1,000,000 and average accounts receivable of $125,000. What is receivables turnover, assuming all sales are credit sales? Answer: 8 times per year ($1,000,000 ÷ $125,000).   Q53. A company measures units produced per labor hour to monitor factory productivity. What type of measure is this? Answer: An operational efficiency measure.   Q54. A company rewards sales employees only for revenue, and they begin granting excessive discounts. What change would best reduce this behavior? Answer: Include profitability or contribution margin alongside revenue in the incentive system.   Section 5: Internal Controls and Risk Assessment Q55. The same employee receives customer payments, records receipts, and reconciles the bank account. What internal control weakness exists? Answer: Inadequate segregation of duties.   Q56. A company requires two authorized signatures for payments above $50,000. What type of control is this? Answer: A preventive authorization control.   Q57. A bank reconciliation identifies an unexplained difference between the bank balance and the general ledger. What should management do? Answer: Investigate the difference and resolve any errors or irregularities promptly.   Q58. A company installs software that blocks employees from accessing payroll records unless they have approved permissions. What control is this? Answer: An access control designed to prevent unauthorized access.   Q59. An internal auditor reviews transactions after they have been processed to identify errors. What type of control activity is this? Answer: A detective control.   Q60. A company has a high-impact cybersecurity threat but estimates its likelihood as low. How should it assess the risk? Answer: Evaluate both likelihood and impact, then prioritize the risk using the organization's risk criteria and risk appetite.   Q61. A company purchases insurance to transfer part of its exposure to property damage. Which risk response is it using? Answer: Risk sharing or transfer.   Q62. A business stops selling a product because the associated regulatory risk is unacceptable. Which risk response is this? Answer: Risk avoidance.   Q63. A company uses an independent employee to review vendor master-file changes. Which risk does this control primarily address? Answer: Unauthorized or fraudulent changes to vendor information.   Q64. A company backs up critical data daily and tests recovery procedures. Which risk-management objective does this support? Answer: Business continuity and disaster recovery.   Q65. An employee receives an email impersonating the CFO and requesting an urgent wire transfer. What threat is illustrated? Answer: Social engineering, specifically a business email compromise attempt. Q66. An auditor finds that a control is properly designed but is not consistently performed. What is the primary issue? Answer: An operating effectiveness deficiency.   Section 6: Accounting Information Systems and Technology    Q67. A company integrates purchasing, inventory, production, and accounting into one system. What type of system is it using? Answer: An enterprise resource planning (ERP) system.   Q68. A company assigns each transaction a unique reference number to trace it from source document to the general ledger. What is this called? Answer: An audit trail.   Q69. An organization uses role-based permissions so that purchasing staff cannot approve their own payments. What principle is being applied? Answer: Least privilege, supported by segregation of duties.   Q70. A company stores transaction data in structured tables that link customers, invoices, and payments. What technology is being used? Answer: A relational database.   Q71. A company wants to process transactions continuously and update inventory balances immediately after each sale. Which processing approach is appropriate? Answer: Online real-time transaction processing.   Q72. A company records transactions throughout the day but updates the central system in scheduled batches overnight. What is this called? Answer: Batch processing.   Q73. An accounting system validates that an invoice number is not duplicated before accepting a transaction. What type of application control is this? Answer: An input validation or duplicate-check control.   Q74. A company moves its financial reporting applications to a cloud provider. Who remains responsible for appropriate access, configuration, and oversight of the company's financial reporting processes? Answer: Company management retains responsibility, even when cloud services are outsourced.   Q75. A company uses robotic process automation to transfer approved invoice data into its accounting system. What is the principal benefit? Answer: Reduced repetitive manual work and improved processing consistency, subject to appropriate controls.   Q76. A system produces an exception report showing duplicate payments and unusually large transactions. How should management use it? Answer: Investigate flagged transactions and resolve confirmed errors or suspicious activity. Section 7: Data Analytics and Emerging Technology Q77. A financial analyst uses historical sales data to summarize monthly revenue and identify trends. What type of analytics is being used? Answer: Descriptive analytics.   Q78. A company investigates why its operating margin declined compared with the previous quarter. What type of analytics is most relevant? Answer: Diagnostic analytics.   Q79. A company uses historical data and statistical models to forecast next quarter's sales. What type of analytics is this? Answer: Predictive analytics.   Q80. A decision-support model recommends the optimal production mix given capacity and demand constraints. What type of analytics is this? Answer: Prescriptive analytics.   Q81. A data analyst combines dates stored in different formats, removes duplicate records, and corrects inconsistent product codes. What process is being performed? Answer: Data cleaning and transformation.   Q82. A company's dashboard shows revenue increasing by 20%, but the data excludes two major regions. What is the main concern? Answer: Incomplete data may produce a misleading conclusion.   Q83. An analyst observes that advertising expenditure and sales rise together. Can the analyst conclude that advertising caused the increase in sales? Answer: No; correlation alone does not establish causation.   Q84. A company uses machine learning to flag potentially fraudulent journal entries. What is a key limitation management must consider? Answer: False positives, false negatives, and model bias require validation and human oversight.   Q85. A company uses blockchain to maintain a shared, tamper-evident record of transactions. Does blockchain automatically guarantee that every recorded transaction is valid? Answer: No; it protects record integrity but does not guarantee the accuracy or legitimacy of the original input.   Q86. A company finds that a reporting dashboard uses outdated data because the source system refreshes only once per week. What should it evaluate first? Answer: Whether the data refresh frequency meets the reporting and decision-making requirements.   Section 8: Quantitative Methods and Statistics Q87. A company has monthly sales of $10,000, $12,000, and $14,000. What is the three-month arithmetic mean? Answer: $12,000.   Q88. An investment has possible returns of 10% with a 60% probability and 4% with a 40% probability. What is the expected return? Answer: 7.6% [(10% × 60%) + (4% × 40%)].   Q89. A dataset contains several extreme values that distort the arithmetic mean. Which measure of central tendency may better represent a typical observation? Answer: The median. Q90. A company finds that its sales increase by an average of $5,000 for every additional $1,000 spent on advertising in a regression model. What does the estimated slope represent? Answer: The estimated change in sales associated with a one-unit increase in advertising expenditure, according to the model.   Q91. A regression model has an R^2   of 0.80. What does this indicate? Answer: The model explains 80% of the observed variation in the dependent variable within the fitted sample.   Q92. A company wants to estimate the probability that demand exceeds available inventory using a large number of simulated demand outcomes. Which technique is appropriate? Answer: Monte Carlo simulation.   Q93. A manager must choose the best product mix given labor-hour and machine-hour limits. Which quantitative technique is most appropriate?   Answer: Linear programming. Q94. A company studies how changes in selling price, volume, and variable cost affect profit, changing one assumption at a time. What technique is it using? Answer: Sensitivity analysis.   Q95. An investment requires $100,000 today and generates $60,000 at the end of each of the next two years. At a 10% discount rate, is the net present value positive or negative? Answer: Positive; NPV is approximately $4,132 . Q96. A company has net income of $50,000 and average total assets of $500,000. What is its return on assets? Answer: 10% ($50,000 ÷ $500,000).   Q97. A company borrows at an interest rate below its expected return on invested funds. What financial concept describes the potential benefit, assuming the investment return is actually achieved and risk is considered? Answer: Positive financial leverage. Q98. An accounts payable employee creates a fictitious vendor, approves invoices, and processes payments to that vendor. Which internal control is missing? Answer: Segregation of duties between vendor creation, invoice approval, and payment processing.   Q99. A company requires purchase orders to be approved before orders are placed with suppliers. What type of control is this? Answer: A preventive control.   Q100. A supervisor reviews monthly bank reconciliations prepared by an accountant. What type of control is being applied? Answer: A detective control.   Q101. A company requires employees to take mandatory vacations, during which another employee performs their duties. What risk can this control help detect? Answer: Fraud or irregularities concealed through continuous control over a process.   Q102. A cashier collects customer payments and also reconciles the cash receipts ledger. Why is this arrangement risky? Answer: The cashier could conceal misappropriation because incompatible duties are not separated.   Q103. A company uses sequentially numbered sales invoices and investigates missing numbers. What is the primary objective? Answer: To detect missing, duplicated, or potentially unauthorized transactions.   Q104. A manager approves a payment without checking the supporting invoice or purchase order. Which control weakness exists? Answer: Inadequate authorization and verification of supporting documentation.   Q105. A company installs a firewall but does not restrict employees' access to sensitive financial records. What is the weakness? Answer: Network security is present, but application and data access controls remain inadequate.   Q106. A company requires multifactor authentication for employees accessing its financial system remotely. What risk does this primarily reduce? Answer: Unauthorized access resulting from compromised passwords or credentials.   Q107. A company discovers that former employees can still log into its accounting system. Which control failed? Answer: User access termination and periodic access-review controls.   Q108. A company uses an automated system to reject journal entries that do not balance. What type of control is this? Answer: An automated application validation control. Q109. A small business cannot fully segregate duties because it has only three accounting employees. What compensating control could management implement? Answer: Independent owner or senior-manager review of bank reconciliations, journal entries, and payment reports. COSO Framework and Control Environment Q110. A company's CEO pressures employees to manipulate earnings to meet analyst expectations. Which COSO internal control component is most directly weakened? Answer: Control environment, particularly management's integrity and ethical values.   Q111. A company identifies financial reporting fraud as a significant threat and evaluates its likelihood and impact. Which COSO component is involved? Answer: Risk assessment.   Q112. A company establishes approval limits for capital expenditures and requires dual authorization for large payments. Which COSO component does this illustrate? Answer: Control activities.   Q113. Management receives reports on control failures and communicates corrective actions to department heads. Which COSO component is most directly illustrated? Answer: Information and communication.   Q114. An internal audit team periodically evaluates whether controls continue to operate effectively. Which COSO component is this? Answer: Monitoring activities.   Q115 A company documents risks but does not design or implement controls to address them. What is the main deficiency? Answer: Risk identification is not being translated into effective control activities and risk responses.   Q116. A board of directors actively challenges management's financial estimates and oversees the external audit process. What control-environment feature does this demonstrate? Answer: Independent board oversight.   Q117 A company has well-designed policies, but employees frequently ignore them and management does not investigate violations. What does this indicate? Answer: Weak control operation and monitoring, despite documented policies.   Section 3: Risk Assessment and Enterprise Risk Management Q118. A manufacturer identifies a low-probability fire risk that could destroy its entire facility. How should management evaluate this risk? Answer: Assess both likelihood and potential impact, including business-continuity consequences.   Q119. A company faces a high risk of losing customer data but accepts the risk without implementing safeguards or documenting approval. What is the main ERM concern? Answer: The risk may exceed the organization's risk appetite and has not been properly evaluated or authorized.   Q120. A company eliminates a hazardous manufacturing process rather than installing expensive safety controls. Which risk response is this? Answer: Risk avoidance.   Q121 A company installs backup generators to reduce losses from power outages. Which risk response does this represent? Answer: Risk mitigation or reduction.   Q122. A company purchases insurance against warehouse fire losses but retains a deductible. Has it eliminated the risk entirely? Answer: No; it transfers part of the financial exposure while retaining residual risk.   1.    Q126. A company decides to retain a minor financial risk because the cost of mitigation exceeds the expected benefit. Which risk response is this? Answer: Risk acceptance, provided the decision is within approved risk appetite and limits. Q127. A company outsources its payroll processing to a third-party provider. Does outsourcing eliminate management's responsibility for payroll controls? Answer: No; management retains responsibility for appropriate oversight and controls. Q128. A company evaluates the risk of fraud before considering any existing controls. What type of risk is it assessing? Answer: Inherent risk. Q129. After implementing access restrictions and transaction reviews, a company reassesses the risk that remains. What is this called? Answer: Residual risk. Q130. A company estimates a 10% annual probability of a cyberattack causing a $200,000 loss. What is the expected annual loss, assuming the estimates are reliable? Answer: $20,000 (10% × $200,000). Section 4: Fraud, IT Risk and Control Evaluation (Q131–Q140) Q131. An employee alters supplier bank details immediately before a large payment. Which control would most directly reduce this risk? Answer: Independent verification and approval of supplier bank-detail changes. Q132. A company receives repeated invoices just below the $10,000 approval threshold. What risk indicator should management investigate? Answer: Possible transaction splitting to circumvent approval limits. Q133. A company has a disaster recovery plan but has never tested whether its backups can be restored. What is the primary weakness? Answer: Recovery capability has not been validated through testing. Q134. A company allows developers to modify production accounting software directly without independent review. What is the principal risk? Answer: Unauthorized or inadequately tested changes could compromise transaction processing and financial reporting. Q135. An employee clicks a fraudulent link and enters company credentials on a fake login page. What type of attack is this? Answer: Phishing. Q136. A company uses encryption to protect financial information stored on laptops. What control objective does this support? Answer: Confidentiality of data, especially if a device is lost or stolen. Q137. An organization detects unusual journal entries posted late at night by users with privileged access. What should management do? Answer: Investigate the entries, validate authorization, and review privileged-user activity logs. Q138. A company performs regular vulnerability scans but never fixes identified critical vulnerabilities. What is the main control weakness? Answer: Remediation and follow-up controls are ineffective. Q139. An organization maintains a risk register but does not assign owners or deadlines to mitigation actions. What is missing? Answer: Clear accountability and action tracking for risk responses. Q140. An internal auditor discovers that a control failed once because of a human error. Does this automatically prove that the entire internal control system is ineffective? Answer: No; the auditor must assess the failure's cause, significance, likelihood of recurrence, and impact alongside other control evidence. Quick exam revision: Key distinctions Concept Meaning Preventive control Stops or reduces an error or irregularity before it occurs. Detective control Identifies an error or irregularity after it occurs. Corrective control Helps fix a detected problem and restore normal operations. Inherent risk Risk before considering controls or risk responses. Residual risk Risk remaining after controls and risk responses. Risk appetite Amount and type of risk an organization is willing to accept in pursuit of objectives. Risk tolerance Acceptable variation around a specific objective or performance target. Control deficiency A control is missing or not properly designed or operated. Compensating control An alternative control that helps address a weakness in the primary control. Segregation of duties Separating authorization, custody, recordkeeping, and reconciliation where practical. CMA exam tip: Pay special attention to scenario questions asking for the best control, the most significant risk, the appropriate risk response, or the weakest COSO component. These require you to distinguish the immediate control failure from its underlying cause.