ANSWERS
50 Q&A on Financial Reporting - US GAAP | US CMA PART 1
_By Prof. Mahaley | Gmsisuccess Mumbai_
This covers the most tested US GAAP topics in CMA Part 1
#### *A. EQUITY & DIVIDENDS*
*1. Q: What is Treasury Stock?*
A: Shares a company buys back from market. Shown as *Contra Equity* and reduces Total Stockholders Equity. No gain/loss on purchase.
*2. Q: Journal entry for Purchase of Treasury Stock $10,000?*
A: Dr. Treasury Stock $10,000 | Cr. Cash $10,000
*3. Q: Journal entry for Reissue Treasury Stock at $12,000. Cost was $10,000?*
A: Dr. Cash $12,000 | Cr. Treasury Stock $10,000 | Cr. APIC - Treasury Stock $2,000
*4. Q: Difference between Small vs Large Stock Dividend?*
A: *Small <25%*: Record at FMV. Dr. Retained Earnings FMV | Cr. Common Stock Par | Cr. APIC
*Large >25%*: Record at Par Value. Dr. Retained Earnings Par | Cr. Common Stock Par
*5. Q: Journal for 20% Small Stock Dividend. 100,000 shares, $1 Par, $10 FMV?*
A: 20,000 shares × $10 = $200,000
Dr. Retained Earnings $200,000 | Cr. Common Stock $20,000 | Cr. APIC $180,000
*6. Q: Journal for 30% Large Stock Dividend. 100,000 shares, $1 Par?*
A: 30,000 shares × $1 = $30,000
Dr. Retained Earnings $30,000 | Cr. Common Stock $30,000
*7. Q: Why do companies declare Interim Dividend?*
A: To distribute profits mid-year to shareholders. Not a legal obligation. Only Final Dividend declared at AGM is a legal obligation once approved.
*8. Q: Which is a legal obligation: Interim Dividend, Annual Dividend, or Finance Cost?*
A: *Finance Cost* on debt is a legal obligation. Dividends become legal only after Board + Shareholder approval.
#### *B. INVESTMENTS & OTHER COMPREHENSIVE INCOME*
*9. Q: 4 Types of Investments under US GAAP?*
A: 1. *Trading Securities* 2. *AFS - Available for Sale* 3. *HTM - Held to Maturity* 4. *Equity Method/Consolidation*
*10. Q: How are Trading Investments reported?*
A: At *Fair Value*. Unrealized Gain/Loss goes to *Net Income*.
*11. Q: How are AFS Investments reported?*
A: At *Fair Value*. Unrealized Gain/Loss goes to *OCI - Other Comprehensive Income*. Not in Net Income.
*12. Q: How are HTM Investments reported?*
A: At *Amortized Cost*. No fair value adjustment. Use effective interest method.
*13. Q: Sale of AFS Investment for $15,000. Cost $12,000, Unrealized Gain $3,000 in OCI?*
A: Dr. Cash $15,000 | Cr. AFS Investment $12,000 | Cr. Realized Gain $3,000
Also: Dr. OCI $3,000 | Cr. Realized Gain $3,000 - To reclassify from OCI to NI
*14. Q: 15% Equity Stake Investment for Long Term?*
A: *Cost Method*. Record at Cost. Dividend = Income. No equity pickup.
*15. Q: 20% to 50% Equity Stake Investment?*
A: *Equity Method*. Investor recognizes share of investee's Net Income.
*16. Q: >50% Equity Stake Investment?*
A: *Consolidation*. Parent + Subsidiary financials combined.
*17. Q: Where is Other Comprehensive Income reported?*
A: In *SOCIE - Statement of Comprehensive Income*. Below Net Income.
#### *C. CASH & CASH FLOWS*
*18. Q: Is Trading Investment held for 3 months part of Cash & Cash Equivalent?*
A: *No*. Only investments with maturity ≤ 3 months from purchase date qualify. Trading intent doesn’t matter.
*19. Q: Direct Method of CFO Illustration?*
A: Cash from Customers - Cash to Suppliers - Cash for Wages - Cash for Interest - Cash for Tax = *CFO*
*20. Q: Indirect Method of CFO?*
A: Net Income + Non-cash expenses -/+ Changes in WC + Losses/Gains = *CFO*. Starts from Net Income.
*21. Q: Effect of Sale of AFS Investment on Cash Flow?*
A: *CFI- Cash Flow from Investing*. Full proceeds are inflow.
*22. Q: Effect of Purchase of Treasury Stock on Cash Flow?*
A: *CFF - Cash Flow from Financing*. Cash Outflow.
#### *D. FIXED ASSETS, DEPRECIATION & IMPAIRMENT*
*23. Q: Formula for Double Declining Balance Method?*
A: *DDB = 2 × Straight Line Rate × Book Value*. Book Value = Cost - Acc Dep.
*24. Q: Formula for Sum-of-the-Years-Digits Method?*
A: *SYD = (Remaining Life / SYD) × Depreciable Base*. SYD = n(n+1)/2
*25. Q: What are Contra Assets?*
A: Accounts that reduce asset value. Ex: *Accumulated Depreciation, Allowance for Doubtful Accounts*.
*26. Q: Difference between Tangible vs Intangible Fixed Assets?*
A: *Tangible*: Plant, Machinery - Depreciated
*Intangible*: Patent, Goodwill - Amortized. Goodwill not amortized,but tested for impairment.
*27. Q: One Step(1st step)Impairment Test for Long-Lived Assets?*
A: Compare *Carrying Value vs Undiscounted Future Cash Flows*. If CV > Cash Flows, impairment exists.
*28. Q: Two Step Impairment Test for Goodwill?*
A: *Step 1*: CV of Reporting Unit vs Fair Value. If CV > FV, proceed.
*Step 2*: Impairment Loss = CV of Goodwill - Implied FV of Goodwill
*29. Q: Journal for Impairment Loss $50,000?*
A: Dr. Impairment Loss $50,000 | Cr. Accumulated Depreciation / Asset $50,000
*30. Q: What are Wasting Assets?*
A: Natural Resources like Oil, Mines. Depleted using *Depletion Method = (Cost / Total Units) × Units Extracted*
#### *E. INCOME STATEMENT & RATIOS*
*31. Q: Format: Sales - COGS = ?*
A: *Gross Profit*
*32. Q: Format: Gross Profit - Operating Exp = ?*
A: *Operating Income*
*33. Q: Where is "Net Income from Continuing Operations" shown?*
A: Above "Discontinued Operations" and "Extraordinary Items" in Multi-step IS.
*34. Q: What is Trading on Equity?*
A: Using Debt to earn higher ROE than cost of debt. Increases shareholder returns.
*35. Q: What is Debt Trap?*
A: When cost of debt > ROA. Additional borrowing reduces EPS and leads to losses.
*36. Q: 3 Categories of Financial Ratios?*
A: *Liquidity*: Current Ratio | *Solvency*: Debt to Equity | *Profitability*: ROE, ROA | *Leverage*: Financial Leverage
#### *F. LEASES & REPORTING*
*37. Q: 5 Criteria to test Finance Lease under US GAAP?*
A: 1. Transfer of Ownership 2. Purchase Option 3. Lease Term > 75% of Life
4. PV of Payments > 90% of FV 5. Asset is specialized
*38. Q: Difference Operating Lease vs Finance Lease?*
A: *Operating*: Rent Expense. Off BS
*Finance*: Asset + Liability. Depreciation + Interest.
*39. Q: What is Sale and Leaseback?*
A: Company sells asset and leases it back. If Finance Lease, gain is deferred.
*40. Q: Contents of Annual Report?*
A: 1. Letter to Shareholders 2. MD&A 3. Financial Statements 4. Notes 5. Auditor Report 6. SOCIE
*41. Q: What is SOCIE?*
A: *Statement of Changes in Equity*. Shows changes in Common Stock, RE, APIC, OCI.
*42. Q: Disclosures below Income Statement?*
A: EPS, Discontinued Ops, OCI, Accounting Policies.
*43. Q: Disclosures below Balance Sheet?*
A: Notes to Accounts, Contingent Liabilities, Related Party Transactions.
#### *G. STAKEHOLDERS & GOVERNANCE*
*44. Q: 3 Types of External Stakeholders & Interest?*
A: *Investors*: ROE | *Creditors*: Solvency | *Government*: Tax
*45. Q: 2 Types of Internal Stakeholders & Interest?*
A: *Management*: Bonus | *Employees*: Job Security, Wages
*46. Q: Difference Executive Director vs Non-Executive Director?*
A: *Executive*: Involved in daily ops. Ex: CFO
*Non-Executive*: Independent. Oversight, Audit Committee.
#### *H. MISCELLANEOUS CONCEPTS*
*47. Q: Long-Lived Assets vs Current Assets?*
A: *Long-Lived*: Used >1 year. PPE, Intangibles
*Current*: Converted to cash <1 year. Inventory, AR
*48. Q: How is Amortization for HTM Bond Premium done?*
A: *Effective Interest Method*. Reduce Interest Income and Carrying Value.
*49. Q: What is the effect of Treasury Stock on EPS?*
A: Reduces outstanding shares, thus *Increases EPS*.
*50.If 20,000 equity shares face value 1$ each issued for 3$,pass journal entries*
Answers.....50 Q&A on Cost Accounting - US CMA PART 1
#### *A. COST CONCEPTS & CLASSIFICATIONS*
*1. Q: Define Cost Object, Cost Centre, Cost Unit?*
A: *Cost Object*: Anything we want to measure cost for. Ex: Product, Dept
*Cost Centre*: Responsibility area. Ex: Machining Dept
*Cost Unit*: Unit of measurement. Ex: Per Unit, Per Hour
*2. Q: Difference between Product Cost and Period Cost?*
A: *Product/Inventoriable Cost*: Attach to product. Ex: DM, DL, Mfg OH. Expensed as COGS
*Period Cost*: Expensed in period incurred. Ex: Selling, Admin Expenses
*3. Q: What are Prime Cost and Conversion Cost?*
A: *Prime Cost* = DM + DL
*Conversion Cost* = DL + Manufacturing Overhead
*4. Q: Examples of Fixed, Variable, Semi-Variable, Step-Fixed Cost?*
A: *Fixed*: Factory Rent $10,000/month
*Variable*: Raw Material $5/unit
*Semi-Variable*: Electricity $2000 + $2/unit
*Step-Fixed*: Supervisor Salary. Same till 10,000 units, jumps after
*5. Q: Engineered Cost vs Discretionary Cost?*
A: *Engineered*: Direct relation to output. Ex: DM, DL
*Discretionary*: Management decision. Ex: R&D, Advertising
*6. Q: What is Relevant Range?*
A: Range of activity where Total Fixed Cost and Variable Cost per unit remain constant.
*7. Q: Factors of Production & their Costs?*
A: *Land*=Rent, *Labor*=Wages, *Capital*=Interest, *Entrepreneur*=Profit
*8. Q: Short Run vs Long Run?*
A: *Short Run*: Some factors fixed. Ex: Factory size
*Long Run*: All factors variable
*9. Q: Historical Cost vs Sunk Cost vs Opportunity Cost?*
A: *Historical*: Past cost incurred
*Sunk*: Past cost, irrelevant for decision
*Opportunity*: Benefit lost by choosing one option. Ex: Use own building
*10. Q: Explicit vs Implicit Cost? Economic Cost?*
A: *Explicit*: Paid in cash. Ex: Wages
*Implicit*: Not paid. Ex: Owner salary
*Economic Cost* = Explicit + Implicit
#### *B. COSTING METHODS & SYSTEMS*
*11. Q: 2 Main Methods of Costing?*
A: *Job Order Costing*: Unique products. Ex: Ship Building
*Process Costing*: Mass production. Ex: Cement
*12. Q: Key Difference Job vs Process Costing?*
A: *Job*: Cost tracked by Job. WIP by Job
*Process*: Cost tracked by Department. WIP by Dept
*13. Q: What is Activity Based Costing?*
A: Allocate OH based on *Cost Drivers* and *Cost Pools*, not just direct labor hours. Reduces Cross Cost Subsidization.
*14. Q: Define Cost Pool, Cost Driver, Cost Driver Rate?*
A: *Cost Pool*: Group of OH. Ex: Setup Costs
*Cost Driver*: Cause of cost. Ex: No. of Setups
*Rate* = Total Pool Cost / Total Driver Units
*15. Q: What is Target Costing?*
A: Target Price - Desired Profit = *Target Cost*. Work backwards.
*16. Q: Life Cycle Costing vs Kaizen Costing vs Backflush Costing?*
A: *Life Cycle*: Cost from R&D to Disposal
*Kaizen*: Continuous cost reduction during production
*Backflush*: Postpone journal entries till completion. Used in JIT
*17. Q: Absorption vs Variable Costing?*
A: *Absorption*: Product cost = DM+DL+Var Mfg OH+Fixed Mfg OH
*Variable*: Product cost = DM+DL+Var Mfg OH. Fixed Mfg OH = Period Cost
*18. Q: Throughput Costing & Theory of Constraints?*
A: *Throughput* = Sales - DM. Only DM is product cost.
*TOC*: Focus on *Bottleneck Resource* to increase throughput.
#### *C. OVERHEADS & ALLOCATION*
*19. Q: Manufacturing OH vs Non-Manufacturing OH?*
A: *Mfg OH*: Indirect for production. Ex: Factory Supervisor
*Non-Mfg OH*: Selling + Admin
*20. Q: Cost Tracing vs Cost Allocation?*
A: *Tracing*: Direct cost to cost object. Ex: DM to Product
*Allocation*: Indirect cost to cost object using base. Ex: Rent
*21. Q: What is Allocation Base?*
A: Measure used to allocate OH. Ex: DL Hours, Machine Hours
*22. Q: Overapplied vs Underapplied Overhead?*
A: *Overapplied*: Applied > Actual. Credit balance
*Underapplied*: Applied < Actual. Debit balance
*23. Q: 3 Ways to Prorate Underapplied OH $12,000?*
A: 1. *Prorate* to WIP, FG, COGS 2. *Write off to COGS* 3. *Carry forward*
*24. Q: Journal to Close $5,000 Overapplied OH to COGS?*
A: Dr. Manufacturing Overhead $5,000 | Cr. COGS $5,000
*25. Q: What is Cross Cost Subsidization?*
A: When one product is overcosted and another undercosted due to poor OH allocation.
#### *D. SPOILAGE, WASTE & INVENTORY*
*26. Q: Normal Spoilage vs Abnormal Spoilage?*
A: *Normal*: Expected. Cost added to good units
*Abnormal*: Unexpected. Expensed as Loss in period
*27. Q: Journal for Abnormal Spoilage $2,000?*
A: Dr. Loss from Abnormal Spoilage $2,000 | Cr. WIP $2,000
*28. Q: FIFO vs LIFO effect on Inventory Valuation?*
A: *Inflation*: FIFO → Higher Ending Inventory, Higher NI
*LIFO*: Lower Ending Inventory, Lower NI, Lower Tax
*29. Q: Cost of Goods Available for Sale vs Cost of Goods Sold?*
A: *CGAS* = Beg FG + Cost of Goods Manufactured
*COGS* = CGAS - Ending FG
#### *E. CVP & DECISION MAKING*
*30. Q: High-Low Method to find Semi-Variable Cost?*
A: *Var Rate* = (Cost High - Cost Low)/(Units High - Units Low)
*Fixed* = Total Cost - Var Rate × Units
*31. Q: What is Marginal Cost?*
A: Additional cost to produce one more unit = Variable Cost per unit
*32. Q: Excess Capacity vs Spare Capacity vs Unused Capacity?*
A: *Excess*: Available but not needed
*Spare*: Reserved for emergency
*Unused*: Budgeted but not used
*33. Q: Overcosting vs Undercosting?*
A: *Overcosted*: Product charged too much OH
*Undercosted*: Product charged too little OH
#### *F. MATERIALS, LABOR & DOCUMENTS*
*34. Q: Skilled vs Unskilled Labor Cost?*
A: *Skilled*: Direct Labor if traceable. Ex: Welder
*Unskilled*: Often Indirect Labor. Part of Mfg OH
*35. Q: Documents in Raw Material Procurement & Risk Owner?*
A: *Docs*: Purchase Requisition → PO → Receiving Report → Vendor Invoice
*Risk Owner*: *Purchasing Dept* till goods received, then *Store Dept*
*36. Q: Journal for Inventory Shipment FOB Shipping Point?*
A: Buyer: Dr. Inventory | Cr. Cash/AP when goods shipped
Seller: Dr. COGS | Cr. FG when goods shipped
*37. Q: Work Cost Sheet Components?*
A: Beg WIP + DM + DL + Applied OH = Total Mfg Cost
- Ending WIP = *COGM*
#### *G. VARIANCES & OTHER TOPICS*
*38. Q: Actual Costing vs Normal Costing vs Standard Costing?*
A: *Actual*: Actual DM, DL, Actual OH Rate
*Normal*: Actual DM, DL, Budgeted OH Rate
*Standard*: Budgeted DM, DL, Budgeted OH Rate. Track Variances
*39. Q: Variable Mfg OH vs Fixed Mfg OH?*
A: *Variable*: Changes with production. Ex: Indirect Material
*Fixed*: Does not change. Ex: Factory Depreciation
*40. Q: Types of Industries & Products?*
A: *Extractive*: Mining | *Manufacturing*: Auto | *Service*: Hospital
#### *H. DEPARTMENT & CONTROL*
*41. Q: 4 Main Departments in Manufacturing & Function?*
A: *Production*: Make product
*Purchasing*: Buy RM
*QC*: Quality Check
*Maintenance*: Support Dept/Auxiliary
*42. Q: Product Cost Centre vs Auxiliary Service Cost Centre with Example?*
A: *Product*: Machining Dept. Directly makes product
*Auxiliary*: Maintenance Dept. Supports Production Dept
#### *I. ADVANCED CONCEPTS*
*43. Q: What is Mixed Cost?*
A: Cost with both Fixed and Variable component. Ex: Utility Bill
*44. Q: Define Long-Lived Assets?*
A: Assets used >1 year. Subject to Depreciation/Amortization/Depletion
*45. Q: What is Bottleneck Resource?*
A: Resource that limits throughput. TOC says maximize it.
*46. Q: Purpose of Cost of Quality Report?*
A: To track Prevention, Appraisal, Internal Failure, External Failure costs.
*47. Q: What is Cost-Benefit Approach in Cost Management?*
A: Implement control only if Benefit > Cost of control.
*48. Q: Key Performance Indicator for Cost Centre?*
A: Budgeted vs Actual Cost. Efficiency Variance.
*49. Q: What is Responsibility Accounting?*
A: Evaluate managers based on costs they can control.
*50. Q: Most important formula for CMA Part 1 Cost Section?*
A: *COGM = Beg WIP + DM Used + DL + Applied OH - End WIP*
*COGS = Beg FG + COGM - End FG*
*Best Wishes 🍀*
*Prof. Mahaley* | Head, Gmsisuccess Mumbai | 9773464206
