Certified Management Accountant Certified Management Accountant 4 — Questions and Answers
Question 1: Which inventory valuation method will produce the highest net income during a period of rising prices?
- LIFO
- FIFO (Correct answer)
- Weighted-average
- Specific identification
Correct answer: FIFO
FIFO assigns older (lower-cost) inventory to COGS during inflation, resulting in lower COGS and higher net income compared to LIFO.
Question 2: A flexible budget differs from a static budget in that it:
- Uses standard costs instead of actual costs
- Adjusts revenues and costs to the actual activity level achieved (Correct answer)
- Is prepared monthly rather than annually
- Includes only variable costs
Correct answer: Adjusts revenues and costs to the actual activity level achieved
A flexible budget recalculates expected revenues and costs at the actual volume, making variance analysis more meaningful.
Question 3: Economic Value Added (EVA) is calculated as:
- Net income minus preferred dividends
- NOPAT minus (WACC × invested capital) (Correct answer)
- EBITDA divided by total debt
- Operating cash flow divided by sales
Correct answer: NOPAT minus (WACC × invested capital)
EVA = Net Operating Profit After Tax − (Weighted Average Cost of Capital × Invested Capital), measuring true economic profit above the cost of all capital.
Question 4: Which type of cost is always irrelevant to a short-term special-order decision when excess capacity exists?
- Variable manufacturing costs
- Incremental fixed costs
- Unavoidable fixed costs (Correct answer)
- Direct materials for the order
Correct answer: Unavoidable fixed costs
Unavoidable (sunk or non-escapable) fixed costs do not change whether the special order is accepted, so they are irrelevant.
Question 5: Under IFRS, development costs meeting certain criteria must be:
- Expensed immediately as incurred
- Capitalized and amortized over the asset's useful life (Correct answer)
- Deferred until the product is sold
- Disclosed only in footnotes
Correct answer: Capitalized and amortized over the asset's useful life
IFRS (IAS 38) requires capitalization of development costs once technical and commercial feasibility are established, unlike US GAAP which expenses them.
Question 6: The degree of operating leverage (DOL) measures:
- The proportion of fixed to variable costs in total cost structure
- The sensitivity of operating income to a change in sales volume (Correct answer)
- A firm's ability to cover interest expense
- The ratio of debt financing to equity financing
Correct answer: The sensitivity of operating income to a change in sales volume
DOL = Contribution Margin ÷ Operating Income, indicating how much operating income changes for each percentage change in sales.
Question 7: In the context of the CMA exam's ethical standards, the principle of 'confidentiality' requires a management accountant to:
- Disclose all information to external auditors on request
- Refrain from disclosing confidential information unless legally obligated (Correct answer)
- Share cost data freely with competitors to promote market efficiency
- Report all internal findings to regulatory bodies
Correct answer: Refrain from disclosing confidential information unless legally obligated
IMA's Statement of Ethical Professional Practice requires CMAs to keep confidential information private except when disclosure is legally mandated.
Certified Management Accountant Certified Management Accountant 4
Which inventory valuation method will produce the highest net income during a period of rising prices?