Certified Management Accountant (CMA) — Questions and Answers

Question 1: Which type of control is designed to detect errors or fraud after they have already occurred?

Detective control (Correct answer)
Preventive control
Directive control
Corrective control

Correct answer: Detective control

Detective controls identify errors or irregularities that have already occurred, such as reconciliations and audits.

Question 2: Which capital budgeting technique explicitly incorporates the time value of money?

Simple Rate of Return
Accounting Rate of Return
Payback Period
Net Present Value (Correct answer)

Correct answer: Net Present Value

NPV discounts all future cash flows to present value using the required rate of return, directly incorporating the time value of money.

Question 3: A company with idle capacity receives a special order for 500 units at $18/unit. Variable cost is $14/unit and allocated fixed overhead is $8/unit. What is the impact on operating income if accepted?

Decrease by $2,000
Increase by $2,000 (Correct answer)
Increase by $9,000
No impact because price is below full cost

Correct answer: Increase by $2,000

With idle capacity, only variable cost ($14) is relevant; the $4/unit spread × 500 units = $2,000 increase in operating income.

Question 4: The 'beyond budgeting' model primarily advocates for:

Combining the capital and operating budgets into a single document
Having external auditors validate the annual budget before approval
Replacing fixed annual budgets with adaptive, relative performance targets and rolling forecasts (Correct answer)
Increasing the number of budget line items for greater detail

Correct answer: Replacing fixed annual budgets with adaptive, relative performance targets and rolling forecasts

Beyond budgeting proposes abandoning rigid annual fixed budgets in favor of dynamic targets benchmarked against peers and continuous rolling forecasts that respond to changing conditions.

Question 5: Which concept describes the risk that a firm's strategy becomes obsolete due to rapid technological or market changes?

Strategic obsolescence risk (Correct answer)
Operational risk
Liquidity risk
Compliance risk

Correct answer: Strategic obsolescence risk

Strategic obsolescence risk arises when environmental changes — technological disruption, shifting customer preferences — erode the relevance of a firm's current strategy.

Question 6: Which of the following is a key limitation of using historical data alone for forecasting?

It requires advanced statistical software unavailable to most companies
Historical data cannot be used in regression or trend analysis
Historical data is too expensive to collect and maintain
Past patterns may not predict future outcomes when market conditions change significantly (Correct answer)

Correct answer: Past patterns may not predict future outcomes when market conditions change significantly

Historical data assumes the future will resemble the past, which breaks down during structural market shifts, economic disruptions, or industry changes.

Question 7: In the context of strategic management, 'dynamic capabilities' refer to:

Management's ability to respond quickly to day-to-day operational issues
Financial flexibility to fund acquisitions during economic downturns
A firm's ability to produce high volumes of output efficiently
The capacity to integrate, build, and reconfigure internal competencies in response to environmental changes (Correct answer)

Correct answer: The capacity to integrate, build, and reconfigure internal competencies in response to environmental changes

Dynamic capabilities, developed by Teece, Pisano, and Shuen, describe higher-order abilities to sense opportunities, seize them, and transform organizational assets as environments evolve.

Question 8: A company has 10,000 stock options outstanding with an exercise price of $20 when the average market price is $25. Under the treasury stock method, how many incremental shares are added to diluted EPS?

10,000
8,000
0
2,000 (Correct answer)

Correct answer: 2,000

Treasury stock method: 10,000 options exercised − (10,000 × $20 / $25) = 10,000 − 8,000 = 2,000 incremental shares.

Question 9: Under the IMA Statement of Ethical Professional Practice, which principle requires CMAs to avoid actual or apparent conflicts of interest?

Integrity (Correct answer)
Competence
Confidentiality
Credibility

Correct answer: Integrity

The Integrity principle requires members to avoid conflicts of interest and to refuse gifts or favors that could influence their actions.

Question 10: If demand for a product falls 10% when price rises 5%, the price elasticity of demand is:

+2.0
−0.5
−2.0 (Correct answer)
+0.5

Correct answer: −2.0

Price elasticity = % change in quantity / % change in price = −10% / 5% = −2.0, indicating elastic demand.

Question 11: A company identifies that a new regulation could increase compliance costs significantly. This is best classified as:

Compliance risk (Correct answer)
Strategic risk
Operational risk
Reputational risk

Correct answer: Compliance risk

Compliance risk arises from the potential failure to meet legal, regulatory, or contractual obligations.

Question 12: A company issues bonds with a face value of $500,000 at a discount of $20,000. Under the effective interest method, how is the discount amortized each period?

Equal amounts each period
As a percentage of face value
Interest expense minus cash interest paid (Correct answer)
Cash interest paid minus interest expense

Correct answer: Interest expense minus cash interest paid

Under the effective interest method, discount amortization equals interest expense (carrying value × market rate) minus cash interest paid (face value × coupon rate).

Question 13: A flexible budget differs from a static budget in that a flexible budget:

Uses only fixed costs and ignores variable costs
Is approved by senior management before the fiscal year begins
Is prepared only once per year and never revised
Adjusts revenues and costs based on actual activity levels (Correct answer)

Correct answer: Adjusts revenues and costs based on actual activity levels

A flexible budget recalculates expected revenues and costs at different levels of activity, allowing meaningful comparison to actual results.

Question 14: The modified internal rate of return (MIRR) addresses which key limitation of IRR?

IRR unrealistically assumes reinvestment at the project's IRR rate (Correct answer)
IRR ignores the scale of the initial investment
IRR ignores the time value of money
IRR cannot be computed for projects with non-normal cash flows

Correct answer: IRR unrealistically assumes reinvestment at the project's IRR rate

MIRR assumes interim cash flows are reinvested at the cost of capital rather than the IRR, providing a more realistic measure of project returns.

Question 15: A construction company uses the percentage-of-completion method. If total estimated costs increase during the project, what is the most likely effect on revenue recognized in the current period?

Revenue decreases because the completion percentage falls (Correct answer)
Revenue is reversed to prior periods
Revenue is unaffected until project completion
Revenue increases proportionally

Correct answer: Revenue decreases because the completion percentage falls

A higher total estimated cost reduces the percentage of completion (costs incurred ÷ total estimated costs), which decreases the cumulative revenue recognized and current period revenue.

Question 16: A company has actual sales of $500,000 and break-even sales of $380,000. Its margin of safety percentage is:

76%
124%
24% (Correct answer)
31.6%

Correct answer: 24%

Margin of safety % = ($500,000 − $380,000) / $500,000 = $120,000 / $500,000 = 24%.

Question 17: Which of the following is an example of a temporary difference that creates a deferred tax LIABILITY?

Accelerated depreciation taken for tax exceeding straight-line book depreciation (Correct answer)
Bad debt expense recognized for book before it is deductible for tax
Warranty expense accrued for book but not yet deductible for tax
Subscription revenue received and taxed but not yet earned for book purposes

Correct answer: Accelerated depreciation taken for tax exceeding straight-line book depreciation

Accelerated tax depreciation reduces taxable income now but book income will be lower in the future, creating a deferred tax liability for taxes owed later.

Question 18: Budget slack (also called budgetary slack) occurs when managers:

Fail to submit their budgets before the deadline
Use stretch goals to motivate higher performance
Intentionally underestimate revenues or overestimate costs to create an easier target (Correct answer)
Submit budgets that are more ambitious than achievable targets

Correct answer: Intentionally underestimate revenues or overestimate costs to create an easier target

Budget slack is the deliberate padding of budgets—underforecasting revenues or overforecasting costs—so actual results look favorable versus the budget.

Question 19: In the context of supply chain risk, 'single sourcing' increases which type of risk?

Liquidity risk
Currency risk
Concentration risk (Correct answer)
Compliance risk

Correct answer: Concentration risk

Relying on a single supplier concentrates dependency risk — if that supplier fails, the entire supply is disrupted.

Question 20: Under the allowance method for bad debts, when a specific account is written off, which of the following is TRUE?

Bad debt expense is recognized at write-off
Net accounts receivable decreases
Net accounts receivable is unchanged (Correct answer)
Total assets decrease at write-off

Correct answer: Net accounts receivable is unchanged

Writing off an account reduces both gross receivables and the allowance by equal amounts, leaving net accounts receivable unchanged.

Question 21: When actual sales volume differs from budgeted sales volume, the resulting difference in profit is best isolated using a:

Price variance
Sales volume variance (Correct answer)
Static budget variance
Spending variance

Correct answer: Sales volume variance

The sales volume variance measures the impact on profit of selling more or fewer units than planned, holding prices and costs constant.

Question 22: Which of the following transactions would be classified as a financing activity on the statement of cash flows?

Payment of dividends to shareholders (Correct answer)
Collection of principal on a note receivable
Purchase of equipment for cash
Purchase of short-term investments

Correct answer: Payment of dividends to shareholders

Payment of dividends to shareholders is a financing activity because it represents a return of capital to equity providers.

Question 23: A company's contribution margin ratio is 40% and fixed costs are $200,000. What is the break-even point in sales dollars?

$280,000
$80,000
$500,000 (Correct answer)
$320,000

Correct answer: $500,000

Break-even in sales dollars = Fixed costs / CM ratio = $200,000 / 0.40 = $500,000.

Question 24: Under the equity method of accounting, how does an investor record dividends received from an investee?

As dividend income on the income statement
As a reduction of the investment account (Correct answer)
As other comprehensive income
As an increase to retained earnings

Correct answer: As a reduction of the investment account

Under the equity method, dividends received reduce the carrying value of the investment because they represent a return of the investor's interest, not income.

Question 25: What is the proper course of action when an Certified Management Accountant professional witnesses unethical behavior by a colleague?

Report through established channels (Correct answer)
Confront the colleague publicly
Ignore it to maintain relationships
Post about it on social media

Correct answer: Report through established channels

Reporting unethical behavior through established channels ensures proper investigation while maintaining professional conduct.

Question 26: Which of the following is a characteristic of a relevant cost in managerial decision-making?

It is recorded under GAAP as a period expense
It has already been incurred and appears on historical financial statements
It is a fixed cost allocated equally across all products
It is a future cost that differs between the decision alternatives being considered (Correct answer)

Correct answer: It is a future cost that differs between the decision alternatives being considered

Relevant costs are future-oriented and differ between alternatives; sunk costs and costs identical across alternatives are irrelevant to the decision.

Question 27: The CMA exam is divided into how many parts?

4
2 (Correct answer)
1
3

Correct answer: 2

The CMA exam consists of two parts: Part 1 (Financial Planning, Performance, and Analytics) and Part 2 (Strategic Financial Management).

Question 28: A company produces three products competing for a bottleneck machine. Product A: CM $20, 4 hrs. Product B: CM $15, 2 hrs. Product C: CM $18, 3 hrs. The optimal ranking is:

B, C, A (by CM per bottleneck hour descending) (Correct answer)
C, A, B (by CM per bottleneck hour descending)
A, B, C (by highest selling price)
A, C, B (by total CM descending)

Correct answer: B, C, A (by CM per bottleneck hour descending)

CM/hr: A = $5, B = $7.50, C = $6; ranking by CM per bottleneck hour gives B ($7.50), C ($6), A ($5).

Question 29: In a transfer pricing context, the minimum transfer price a selling division should accept equals:

Standard cost plus 10%
Full absorption cost only
Variable cost plus opportunity cost (Correct answer)
Market price minus selling costs

Correct answer: Variable cost plus opportunity cost

The floor for a transfer price is variable cost plus any opportunity cost (foregone contribution margin from external sales).

Question 30: A firm's purchasing department exceeded its budget because commodity prices rose unexpectedly. This best represents:

A price variance (Correct answer)
A mix variance
A volume variance
An efficiency variance

Correct answer: A price variance

An unexpected increase in commodity prices results in a price (spending) variance because actual cost per unit of input differs from standard.

Question 31: A former employer asks a CMA for detailed cost information about a product she worked on. She is now employed elsewhere. She should:

Provide the data because she no longer works there
Contact the IMA Ethics Hotline to get permission
Share only publicly available portions and estimate the rest
Refuse, as confidentiality obligations survive employment (Correct answer)

Correct answer: Refuse, as confidentiality obligations survive employment

Confidentiality under IMA standards extends past the end of employment; CMAs must not disclose former employers' proprietary information.

Question 32: In professional documentation for Certified Management Accountant, what is the best practice for organizing information?

Longest sections first
Random order of ideas
Alphabetical order always
Logical structure with clear headings and progression (Correct answer)

Correct answer: Logical structure with clear headings and progression

Logical structure with clear headings helps readers find information quickly and follow the progression of ideas effectively.

Question 33: Incremental budgeting is criticized primarily because it:

Does not account for seasonal fluctuations in revenue
Requires too many management approvals at each level
Perpetuates inefficiencies by treating prior-year spending as automatically justified (Correct answer)
Is incompatible with accrual-basis accounting

Correct answer: Perpetuates inefficiencies by treating prior-year spending as automatically justified

Incremental budgeting simply adds a percentage to last year's figures without questioning whether the base spending was necessary or efficient.

Question 34: Which concept describes the process of evaluating whether internal controls are present and functioning over time through both ongoing monitoring and separate evaluations?

Risk assessment
Monitoring (Correct answer)
Control environment
Control activities

Correct answer: Monitoring

Monitoring, the fifth COSO component, involves ongoing and periodic evaluations to determine whether controls are designed and operating effectively.

Question 35: Under SFAS 95 (ASC 230), interest paid by a company is classified in the statement of cash flows as:

Always a financing activity
Always an investing activity
An operating activity under US GAAP (Correct answer)
Either operating or financing, at management's discretion

Correct answer: An operating activity under US GAAP

Under US GAAP (ASC 230), interest paid is classified as an operating activity, though this differs from IFRS which allows financing classification.

Question 36: Scenario analysis in risk management is primarily used to:

Calculate the exact probability of a single risk event
Identify which employees are responsible for specific risks
Determine the market value of assets at risk
Evaluate how an organization would perform under different hypothetical conditions (Correct answer)

Correct answer: Evaluate how an organization would perform under different hypothetical conditions

Scenario analysis tests organizational resilience by modeling responses to various plausible future states.

Question 37: Pro forma financial statements in the budgeting context are best described as:

Audited statements required by the SEC for public companies
Historical statements restated to exclude non-recurring items
Projected financial statements prepared to reflect the expected results of planned activities (Correct answer)
Statements prepared under IFRS rather than US GAAP

Correct answer: Projected financial statements prepared to reflect the expected results of planned activities

Pro forma statements are forward-looking financial statements built from budget assumptions to show the projected income statement, balance sheet, and cash flows.

Question 38: The discount rate that makes a project's NPV equal to zero is the:

Cost of equity
Weighted average cost of capital
Required rate of return
Internal rate of return (Correct answer)

Correct answer: Internal rate of return

The IRR is defined as the specific discount rate at which the project's NPV equals exactly zero.

Question 39: To calculate a project's NPV, cash flows are:

Discounted to present value, summed, and then reduced by the initial investment (Correct answer)
Multiplied by the discount rate and compared to the initial cost
Summed together and compared to the initial investment without adjustment
Divided by the project's life to find the average annual return

Correct answer: Discounted to present value, summed, and then reduced by the initial investment

NPV requires discounting each future cash flow to present value, summing those present values, and subtracting the initial investment.

Question 40: A CMA accepts a consulting contract with a supplier to his employer without disclosure. This MOST likely violates which IMA ethical standard?

Integrity — having an undisclosed conflict of interest (Correct answer)
Confidentiality — sharing proprietary data
Competence — failing to maintain professional skills
Credibility — misrepresenting facts

Correct answer: Integrity — having an undisclosed conflict of interest

Integrity requires CMAs to disclose all actual or apparent conflicts of interest, including outside employment relationships with suppliers.

Question 41: An organization's risk tolerance differs from risk appetite in that risk tolerance refers to:

The process used to rank risks by priority
The strategic goals that drive risk-taking behavior
The probability that a given risk event will occur
The maximum acceptable variation around an objective before action is required (Correct answer)

Correct answer: The maximum acceptable variation around an objective before action is required

Risk tolerance is the acceptable deviation from risk appetite — the operational boundary within which management must stay.

Question 42: Under zero-based budgeting (ZBB), each budget period requires managers to:

Justify all expenditures from scratch, regardless of prior spending (Correct answer)
Match budgeted spending to the previous year's actual spending
Allocate costs based solely on activity drivers
Increase the prior year's budget by an inflation factor

Correct answer: Justify all expenditures from scratch, regardless of prior spending

ZBB requires every line item to be justified anew each period rather than simply rolling forward prior-period amounts.

Question 43: A company writes down inventory to net realizable value. Under US GAAP, if market prices later recover, how is this handled?

The recovery is recognized as other comprehensive income
No reversal is permitted; the written-down value becomes the new cost basis (Correct answer)
The write-down can be reversed up to the original cost
The inventory is written up to current market value

Correct answer: No reversal is permitted; the written-down value becomes the new cost basis

Under US GAAP, inventory write-downs establish a new cost basis and cannot be reversed, unlike IFRS which allows partial reversals.

Question 44: An inherent limitation of internal controls is that they can be overridden by:

Regulatory agencies
The audit committee
External auditors
Management (Correct answer)

Correct answer: Management

Management override is a key inherent limitation because management has the authority to bypass established controls.

Question 45: Which inventory valuation method typically results in the lowest taxable income during a period of rising prices?

Weighted average
FIFO
LIFO (Correct answer)
Specific identification

Correct answer: LIFO

During rising prices, LIFO assigns the most recent (higher) costs to COGS, reducing taxable income compared to FIFO or weighted average.

Question 46: When a company's actual material cost is higher than the flexible budget amount, the result is a:

Unfavorable spending variance (Correct answer)
Favorable efficiency variance
Unfavorable volume variance
Favorable spending variance

Correct answer: Unfavorable spending variance

When actual costs exceed the flexible budget (adjusted for actual volume), the variance is unfavorable because the company spent more than expected per unit of activity.

Question 47: When a CMA faces an ethical conflict that cannot be resolved internally after escalating to the audit committee, the IMA recommends:

Consult an attorney about legal obligations and resign if necessary (Correct answer)
Comply with management's directive and document disagreement in writing
Contact a competitor to expose the misconduct
Immediately file a whistleblower complaint with the SEC

Correct answer: Consult an attorney about legal obligations and resign if necessary

If internal resolution fails, the IMA advises consulting legal counsel about obligations and rights, and resignation may ultimately be necessary.

Question 48: Which metric is most useful for evaluating program effectiveness in Certified Management Accountant?

Number of staff involved
Number of meetings held
Amount of money spent
Outcome-based performance indicators (Correct answer)

Correct answer: Outcome-based performance indicators

Outcome-based performance indicators directly measure whether the program is achieving its intended results and goals.

Question 49: What is the recommended approach when managing conflicting priorities in Certified Management Accountant?

Address them in alphabetical order
Delegate all decisions upward
Prioritize based on impact and urgency (Correct answer)
Ignore lower-priority items

Correct answer: Prioritize based on impact and urgency

Prioritizing based on impact and urgency ensures the most critical issues receive attention first while maintaining progress on other goals.

Question 50: In the context of budgeting, a 'stretch goal' is intended to:

Replace financial metrics with non-financial key performance indicators
Represent the minimum acceptable performance threshold for continued employment
Establish ambitious but achievable targets that push employees toward higher performance (Correct answer)
Set targets so difficult they are virtually impossible to achieve, discouraging motivation

Correct answer: Establish ambitious but achievable targets that push employees toward higher performance

Stretch goals are challenging targets set above current performance levels to motivate improvement, while still being attainable with significant effort.

Question 51: Kaizen budgeting is most closely associated with:

Using statistical regression to forecast next year's costs
Incorporating continuous improvement targets into the budgeting process (Correct answer)
Building budgets from historical cost data without change
Allocating overhead based on machine hours alone

Correct answer: Incorporating continuous improvement targets into the budgeting process

Kaizen budgeting embeds incremental improvement goals (cost reductions, efficiency gains) directly into the budget rather than assuming current standards remain constant.

Question 52: Which budget is typically prepared first when constructing a master budget for a manufacturing company?

Production budget
Cash budget
Direct materials budget
Sales budget (Correct answer)

Correct answer: Sales budget

The sales budget is the starting point of the master budget because all other operating budgets depend on the projected sales volume.

Question 53: A company's margin of safety is $150,000 and its break-even sales are $600,000. What is the margin of safety ratio?

33%
15%
20% (Correct answer)
25%

Correct answer: 20%

Margin of safety ratio = $150,000 ÷ ($600,000 + $150,000) = $150,000 ÷ $750,000 = 20%.

Question 54: A CMA discovers that her supervisor has directed her to record a transaction in a way that inflates earnings. What is the FIRST step she should take?

Discuss the issue with her immediate supervisor (Correct answer)
Resign from the company
Follow the supervisor's directive to avoid conflict
Report immediately to the SEC

Correct answer: Discuss the issue with her immediate supervisor

The IMA's conflict resolution process begins by raising the issue with the immediate supervisor before escalating further.

Question 55: Which of the following best describes an operating budget?

A long-term plan for acquiring major assets such as property and equipment
A plan for raising debt or equity capital during the year
A budget that focuses exclusively on cash receipts and disbursements
A short-term budget covering revenues and expenses for routine business operations (Correct answer)

Correct answer: A short-term budget covering revenues and expenses for routine business operations

An operating budget covers the day-to-day revenues and operating expenses (sales, COGS, SG&A) for a defined period, typically one year.

Question 56: A CMA is asked by her CFO to prepare forecasts using assumptions she believes are unreasonably optimistic. Which ethical principle is MOST directly at stake?

Competence
Confidentiality
Credibility (Correct answer)
Commitment

Correct answer: Credibility

Credibility requires CMAs to communicate information fairly and objectively; preparing forecasts with knowingly unrealistic assumptions violates this principle.

Question 57: In a participative (bottom-up) budgeting process, budgets are primarily:

Based entirely on prior-year actuals with no management input
Set by top executives and imposed on lower-level managers
Prepared by external consultants to ensure objectivity
Developed by lower-level managers and submitted upward for approval (Correct answer)

Correct answer: Developed by lower-level managers and submitted upward for approval

Participative budgeting involves operational managers in building their own budgets, which tends to increase commitment and incorporate detailed local knowledge.

Question 58: Sensitivity analysis in budgeting is used to:

Ensure budget assumptions comply with GAAP
Calculate the break-even point for a new product launch
Distribute overhead costs to products using activity rates
Examine how changes in key assumptions affect budgeted outcomes (Correct answer)

Correct answer: Examine how changes in key assumptions affect budgeted outcomes

Sensitivity analysis tests how budgeted profit, cash flow, or other metrics change when individual assumptions (price, volume, cost rates) are varied.

Question 59: In Certified Management Accountant practice, what is the best approach to quality improvement in performance measurement?

Wait for problems to occur before acting
Use data-driven methods with measurable outcomes (Correct answer)
Make changes without measuring results
Copy what other organizations do without analysis

Correct answer: Use data-driven methods with measurable outcomes

Data-driven quality improvement with measurable outcomes ensures that changes actually produce the intended improvements and can be verified.

Question 60: What is the purpose of active listening in Certified Management Accountant professional interactions?

To wait for your turn to speak
To appear polite
To fully understand the speaker's message and respond appropriately (Correct answer)
To memorize every word

Correct answer: To fully understand the speaker's message and respond appropriately

Active listening involves fully concentrating on the speaker's message to understand it completely before formulating an appropriate response.

Question 61: Under ASC 350, goodwill impairment testing requires comparing the fair value of a reporting unit to its carrying amount. If the reporting unit's fair value is less than its carrying amount, the impairment loss is:

The full goodwill balance written off immediately
Deferred and amortized over the remaining useful life
Equal to the excess of carrying amount over fair value, limited to the goodwill balance (Correct answer)
Allocated proportionally to all assets in the reporting unit

Correct answer: Equal to the excess of carrying amount over fair value, limited to the goodwill balance

Under ASU 2017-04, goodwill impairment equals the excess of carrying amount over fair value but cannot exceed the total goodwill assigned to the reporting unit.

Question 62: A company diversifies its investments across multiple asset classes to reduce portfolio risk. This strategy is an example of:

Risk acceptance
Risk avoidance
Risk transfer
Risk mitigation through diversification (Correct answer)

Correct answer: Risk mitigation through diversification

Diversification reduces concentration risk by spreading exposure across assets whose returns are not perfectly correlated.

Question 63: Which forecasting method uses the relationship between a dependent variable and one or more independent variables to predict future values?

Regression analysis (Correct answer)
Moving average
Exponential smoothing
Delphi method

Correct answer: Regression analysis

Regression analysis models the statistical relationship between variables (e.g., sales and advertising spend) to forecast the dependent variable based on expected inputs.

Question 64: A production budget is calculated as:

Actual sales units – desired ending inventory + beginning inventory
Budgeted sales units × standard cost per unit
Beginning inventory + purchases – ending inventory
Budgeted sales units + desired ending inventory – beginning inventory (Correct answer)

Correct answer: Budgeted sales units + desired ending inventory – beginning inventory

Units to produce = budgeted sales + desired ending finished goods inventory − beginning finished goods inventory, ensuring sufficient stock is available.

Question 65: Which of the following is an example of a violation of the Integrity standard under IMA ethics?

Failing to complete required CPE hours on time
Accepting an expensive gift from a vendor seeking a new contract (Correct answer)
Preparing a financial report using an unfamiliar accounting method
Inadvertently disclosing confidential data due to a system error

Correct answer: Accepting an expensive gift from a vendor seeking a new contract

Accepting gifts that could influence professional decisions violates the Integrity standard by creating an actual or apparent conflict of interest.

Question 66: In Certified Management Accountant practice, what is the primary purpose of strategic planning?

To create paperwork
To reduce workforce
To satisfy external auditors
To align resources with goals and anticipate challenges (Correct answer)

Correct answer: To align resources with goals and anticipate challenges

Strategic planning aligns organizational resources with goals and helps anticipate challenges before they become critical issues.

Question 67: Which committee is primarily responsible for risk oversight at the board level in a publicly traded US company?

Nominating and governance committee
Executive committee
Audit committee (Correct answer)
Compensation committee

Correct answer: Audit committee

The audit committee typically oversees the organization's risk management framework and internal control environment at the board level.

Question 68: In a sale-leaseback transaction where the transfer qualifies as a sale under ASC 606, how does the seller-lessee recognize any gain on the sale?

Defer the entire gain over the lease term
Recognize only the portion of gain related to the buyer-lessor's retained interest
Recognize the full gain immediately at the time of sale (Correct answer)
Recognize no gain; only adjust the right-of-use asset

Correct answer: Recognize the full gain immediately at the time of sale

When a sale-leaseback qualifies as a sale, the seller-lessee recognizes the full gain immediately, and the leaseback is recorded as an operating or finance lease.

Question 69: Which of the following items is reported as Other Comprehensive Income (OCI) rather than in net income?

Gains on sale of plant assets
Unrealized gains on trading securities
Interest income on held-to-maturity investments
Foreign currency translation adjustments (Correct answer)

Correct answer: Foreign currency translation adjustments

Foreign currency translation adjustments are reported in OCI and accumulate in accumulated other comprehensive income (AOCI) on the balance sheet.

Question 70: The IMA's ethical conflict resolution guidance suggests that if a CMA's supervisor is involved in the unethical conduct, the CMA should next approach:

The next higher managerial level or the audit committee (Correct answer)
The company's largest shareholder
The IMA Ethics Hotline directly
The financial press

Correct answer: The next higher managerial level or the audit committee

When the immediate supervisor is implicated, the CMA should escalate to the next higher level of management or the audit committee.

Question 71: A risk register typically includes all of the following EXCEPT:

Insurance premium amounts paid (Correct answer)
Risk description and category
Probability and impact ratings
Risk owner and response plan

Correct answer: Insurance premium amounts paid

A risk register documents identified risks, their assessments, ownership, and responses — not accounting entries for insurance premiums.

Question 72: What is the most important element of effective professional communication in Certified Management Accountant?

Avoiding all technical terms
Using complex vocabulary
Clarity and audience-appropriate language (Correct answer)
Writing lengthy documents

Correct answer: Clarity and audience-appropriate language

Effective communication requires clarity and language appropriate for the audience to ensure the message is understood as intended.

Question 73: The profitability index (PI) is calculated as:

Initial investment divided by average annual cash flow
IRR divided by cost of capital
Net cash flows divided by initial investment
Present value of future cash flows divided by initial investment (Correct answer)

Correct answer: Present value of future cash flows divided by initial investment

The profitability index equals the present value of future cash flows divided by the initial investment, indicating value created per dollar invested.

Question 74: When two mutually exclusive projects have conflicting NPV and IRR rankings, which method should be preferred?

NPV, because it measures absolute value added to the firm (Correct answer)
Payback period, because it is simplest to compute
IRR, because it expresses return as a percentage
Accounting rate of return, because it uses book values

Correct answer: NPV, because it measures absolute value added to the firm

NPV is preferred for mutually exclusive projects because it directly measures the absolute increase in firm value, aligning with the wealth-maximization objective.

Question 75: Under the Sarbanes-Oxley Act, which of the following responsibilities does a CMA in a public company have that reinforces IMA ethical standards?

Reporting directly to the PCAOB rather than internal management
Preparing only tax returns and not financial statements
Certifying internal controls and financial statement accuracy alongside senior management (Correct answer)
Immunity from prosecution for following supervisor directives

Correct answer: Certifying internal controls and financial statement accuracy alongside senior management

SOX requirements for accurate financial reporting and internal control certification align with IMA standards of integrity and credibility.

Question 76: The Delphi method of forecasting relies on:

Extrapolating a time series trend line into the future
Running Monte Carlo simulations of possible outcomes
Calculating a weighted average of recent historical data
Iterative anonymous expert consensus to converge on a forecast (Correct answer)

Correct answer: Iterative anonymous expert consensus to converge on a forecast

The Delphi method gathers forecasts anonymously from a panel of experts across multiple rounds, feeding back summarized results until consensus is reached.

Question 77: Business continuity planning (BCP) is designed primarily to:

Transfer catastrophic risks to insurance companies
Ensure critical operations can continue or recover quickly after a disruption (Correct answer)
Identify and rank all risks by probability
Eliminate all risks before they occur

Correct answer: Ensure critical operations can continue or recover quickly after a disruption

BCP focuses on maintaining or rapidly restoring essential business functions following a significant disruption event.

Question 78: What is the primary purpose of a code of ethics in Certified Management Accountant practice?

To increase certification fees
To guide professional conduct and protect the public (Correct answer)
To complicate decision-making
To restrict professional freedom

Correct answer: To guide professional conduct and protect the public

A code of ethics provides guidance for professional conduct while protecting the public from unethical practices.

Question 79: A company has a deferred tax asset of $80,000 and determines it is more likely than not that only $60,000 will be realized. What should the company record?

No adjustment is needed
Record a valuation allowance of $60,000
Write off the entire deferred tax asset
Record a valuation allowance of $20,000 (Correct answer)

Correct answer: Record a valuation allowance of $20,000

A valuation allowance is required for the portion of a deferred tax asset that is more likely than not to be unrealizable, which is $80,000 − $60,000 = $20,000.

Question 80: A CMA learns during the course of his work that a colleague is embezzling funds. The colleague is also a close friend. Which action BEST reflects IMA ethical standards?

Do nothing because it is not directly part of his job duties
Confront the colleague privately and give them a chance to correct it
Report the embezzlement through appropriate internal channels (Correct answer)
Accept partial funds to stay quiet

Correct answer: Report the embezzlement through appropriate internal channels

IMA ethical standards require reporting fraud or illegal acts through appropriate internal channels, regardless of personal relationships.

Question 81: In a decentralized organization, which performance measure best aligns divisional manager incentives with overall company goals?

Residual income or EVA (Correct answer)
Contribution margin ratio
Divisional ROI only
Divisional gross profit

Correct answer: Residual income or EVA

Residual income and EVA encourage managers to accept investments that exceed the cost of capital, aligning with firm-wide value creation.

Question 82: Which of the following is NOT a required disclosure in the notes to financial statements under US GAAP for operating segments?

Segment return on equity (Correct answer)
Segment total assets
Segment revenues
Segment profit or loss

Correct answer: Segment return on equity

ASC 280 requires disclosure of segment revenues, profit/loss, and assets, but does not require return on equity disclosures at the segment level.

Question 83: Which financial statement reconciles net income to cash flows from operating activities under the indirect method?

Statement of cash flows (Correct answer)
Balance sheet
Income statement
Statement of stockholders' equity

Correct answer: Statement of cash flows

The statement of cash flows, operating section under the indirect method, starts with net income and adjusts for non-cash items and working capital changes.

Question 84: Which risk management concept involves creating multiple layers of controls so that if one fails, others remain?

Control convergence
Defense in depth (Correct answer)
Risk aggregation
Risk concentration

Correct answer: Defense in depth

Defense in depth (or layered controls) ensures redundancy so that no single control failure creates a catastrophic exposure.

Question 85: Which term describes the risk that remains after management has implemented controls?

Residual risk (Correct answer)
Inherent risk
Control risk
Secondary risk

Correct answer: Residual risk

Residual risk is the level of risk exposure remaining after controls and other risk responses have been applied.

Question 86: A company sells a product with a one-year warranty. Under ASC 606, how should warranty obligations be accounted for?

As a provision (liability) under ASC 460 if it provides assurance-type coverage only (Correct answer)
Always as a separate performance obligation
Expensed immediately at point of sale
Deferred until warranty claims are actually made

Correct answer: As a provision (liability) under ASC 460 if it provides assurance-type coverage only

Assurance-type warranties (guaranteeing the product meets agreed specifications) are accounted for as a liability under ASC 460, not as a separate performance obligation.

Question 87: When assessing the impact of a risk, which dimension is NOT typically considered?

Reputational impact
Financial impact
The risk owner's personal career risk (Correct answer)
Regulatory or legal impact

Correct answer: The risk owner's personal career risk

Risk impact assessments focus on organizational dimensions — financial, operational, reputational, and regulatory — not personal career considerations.

Question 88: Real options in capital budgeting refer to:

Managerial flexibility to modify a project after the initial investment is made (Correct answer)
Exchange-traded options contracts on physical commodities
Rights to purchase real estate assets at fixed prices
Government permits granting development rights

Correct answer: Managerial flexibility to modify a project after the initial investment is made

Real options represent management's embedded flexibility to expand, abandon, defer, or switch a project as uncertainty resolves over time, adding value beyond standard NPV.

Question 89: Activity-based budgeting (ABB) improves on traditional budgeting primarily by:

Linking resource consumption to activities and cost drivers rather than departments alone (Correct answer)
Requiring every cost to be approved by the CFO individually
Replacing variance analysis with balanced scorecard metrics
Limiting the budget to a single cost pool for simplicity

Correct answer: Linking resource consumption to activities and cost drivers rather than departments alone

ABB allocates resources based on planned activities and their cost drivers, giving managers a more accurate picture of what drives spending.

Question 90: What is the key benefit of evidence-based decision making in Certified Management Accountant management?

It reduces reliance on data
It speeds up all processes
It eliminates all risk
It improves accuracy and reduces bias in decisions (Correct answer)

Correct answer: It improves accuracy and reduces bias in decisions

Evidence-based decision making uses data and research to improve the accuracy of decisions and reduce the influence of personal bias.

Question 91: What is the key benefit of evidence-based decision making in Certified Management Accountant management?

It improves accuracy and reduces bias in decisions (Correct answer)
It reduces reliance on data
It eliminates all risk
It speeds up all processes

Correct answer: It improves accuracy and reduces bias in decisions

Evidence-based decision making uses data and research to improve the accuracy of decisions and reduce the influence of personal bias.

Question 92: Which of the following BEST illustrates the Competence principle of the IMA Statement of Ethical Professional Practice?

Disclosing a conflict of interest to a supervisor
Providing complete and unbiased analysis in a management report
Refusing to share a confidential report with unauthorized personnel
Completing 30 hours of CPE in areas relevant to current job responsibilities (Correct answer)

Correct answer: Completing 30 hours of CPE in areas relevant to current job responsibilities

Competence requires maintaining professional knowledge and skills through ongoing education, such as completing CPE relevant to current responsibilities.

Question 93: In a standard costing system, a favorable direct labor efficiency variance occurs when:

Standard wage rate exceeds the actual rate
Standard hours allowed exceed actual hours worked (Correct answer)
Actual hours worked exceed standard hours allowed
Actual wage rate exceeds the standard rate

Correct answer: Standard hours allowed exceed actual hours worked

A favorable labor efficiency variance means workers completed the output in fewer hours than the standard allowed, reducing labor costs.

Question 94: A project's net present value (NPV) is positive. This indicates the project:

Has an IRR equal to the cost of capital
Creates value above the required rate of return (Correct answer)
Has a payback period exceeding project life
Destroys shareholder value

Correct answer: Creates value above the required rate of return

A positive NPV means the project's returns exceed the required rate, creating net value for the firm.

Question 95: In computing earnings per share, which securities are included in the weighted-average shares for diluted EPS but NOT basic EPS?

Treasury shares repurchased during the year
Convertible bonds assumed converted to common shares (Correct answer)
Stock dividends issued during the year
Common shares outstanding at year-end

Correct answer: Convertible bonds assumed converted to common shares

Diluted EPS includes the potential dilutive effect of convertible securities such as convertible bonds, while basic EPS uses only actual common shares outstanding.

Question 96: The certainty equivalent approach to risk adjustment converts risky cash flows by:

Discounting at the weighted average cost of capital
Multiplying each risky cash flow by a certainty equivalent coefficient, then discounting at the risk-free rate (Correct answer)
Adding a risk premium to the discount rate
Increasing projected cash flows by the expected inflation rate

Correct answer: Multiplying each risky cash flow by a certainty equivalent coefficient, then discounting at the risk-free rate

The certainty equivalent approach adjusts each risky cash flow downward to its risk-free equivalent and then discounts at the risk-free rate.

Question 97: Which concept requires Certified Management Accountant professionals to avoid conflicts of interest?

Objectivity and impartiality (Correct answer)
Time management
Competence
Continuing education

Correct answer: Objectivity and impartiality

Objectivity and impartiality require professionals to identify and avoid situations where personal interests could compromise professional judgment.

Question 98: A cash budget is primarily used by management to:

Allocate overhead costs to individual product lines
Determine the optimal product mix for the upcoming year
Set selling prices based on full cost absorption
Forecast periods of cash surplus or shortage to plan financing needs (Correct answer)

Correct answer: Forecast periods of cash surplus or shortage to plan financing needs

The cash budget projects cash inflows and outflows over time, enabling management to anticipate shortfalls and arrange financing or identify surplus funds for investment.

Question 99: Sensitivity analysis in capital budgeting examines:

The impact on NPV of changing one variable at a time while holding others constant (Correct answer)
The full probability distribution of project cash flows
All possible combinations of variable changes simultaneously
Only the effect of changes in the discount rate on NPV

Correct answer: The impact on NPV of changing one variable at a time while holding others constant

Sensitivity analysis changes one input variable at a time (e.g., unit price, volume) to show how sensitive NPV is to that single factor.

Question 100: Which of the following MOST accurately reflects the IMA's position on legal vs. ethical obligations?

Ethical standards only apply when legal standards are silent
An action can be legal but still violate IMA ethical standards (Correct answer)
Ethics standards are aspirational and not binding on CMAs
Legal compliance automatically satisfies ethical obligations

Correct answer: An action can be legal but still violate IMA ethical standards

IMA standards hold that members must go beyond legal compliance; something may be legal yet still violate the principles of integrity, credibility, or confidentiality.

Certified Management Accountant (CMA)

The CMA credential, awarded by the Institute of Management Accountants (IMA), validates expertise in financial planning, performance management, and decision-making across two exam parts covering financial reporting, budgeting, corporate finance, risk management, investment decisions, and professional ethics.

100

Questions

180 min

Time Limit

72%

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