External Financial Reporting Decisions (Practice Quiz)

Are you preparing for the CMA exam and looking for the best ways to test your knowledge? Practice is key! In this post, we are diving deep into CMA Part 1: Financial Planning, Performance, and Analytics, specifically focusing on the critical first chapter, Section A: External Financial Reporting Decisions.

To help you gauge your readiness, we’ve put together a high-quality practice set of External Financial Reporting Decisions (Practice Quiz).

Below, you will find 10 comprehensive multiple-choice questions covering essential topics like revenue recognition, inventory methods, lease accounting, and business combinations. Grab a notebook, work through these questions, and when you are finished, download the free PDF at the bottom of the page to access the correct answers and detailed explanations!

QUESTION 1: REVENUE RECOGNITION (5-STEP PROCESS)

A construction company enters into a contract to build a warehouse for $1,000,000. The contract includes a $100,000 bonus if the project is completed within 6 months. The company has significant experience with similar projects and estimates a 70% probability of early completion and a 30% probability of delay. Using the ‘most likely amount’ method, what is the total transaction price the company should record?

A. $1,000,000
B. $1,070,000
C. $1,100,000
D. $770,000

QUESTION 2: INVENTORY (LIFO LIQUIDATION)

A company using the LIFO method for inventory begins the year with 5,000 units at $10 each. During the year, it purchases 10,000 units at $20 each but sells 12,000 units. What is the impact of this LIFO liquidation on the Cost of Goods Sold (COGS) compared to if they had purchased enough units to avoid liquidation?

A. COGS will be $20,000 higher.
B. COGS will be $20,000 lower.
C. COGS will be $50,000 higher.
D. COGS will be $10,000 lower.

QUESTION 3: STATEMENT OF CASH FLOWS (INDIRECT METHOD)

When reconciling Net Income to Cash Flow from Operations, how should a $5,000 gain on the sale of equipment and a $2,000 increase in Inventory be treated?

A. Add $5,000; Subtract $2,000
B. Subtract $5,000; Add $2,000
C. Subtract $5,000; Subtract $2,000
D. Add $5,000; Add $2,000

QUESTION 4: INVESTMENTS (EQUITY METHOD)

Company A owns 30% of Company B and uses the equity method. During the year, Company B reports Net Income of $100,000 and pays total dividends of $40,000. What is the net increase in Company A’s ‘Investment in Company B’ account?

A. $30,000
B. $12,000
C. $18,000
D. $42,000

QUESTION 5: LEASE ACCOUNTING (LESSEE)

A lessee signs a 5-year lease for an asset with a useful life of 10 years. There is no transfer of ownership or purchase option. The present value of lease payments is 60% of the asset’s fair value. Under U.S. GAAP, how should this lease be classified?

A. Finance Lease
B. Operating Lease
C. Sales-type Lease
D. Short-term Lease

QUESTION 6: ACCOUNTS RECEIVABLE (FACTORING)

A company factors $100,000 of receivables ‘with recourse.’ The factor charges a 5% fee and retains 10% to cover sales returns. How should the company initially record the ‘with recourse’ obligation?

A. As a reduction in the fee expense.
B. As a liability representing the estimated fair value of the recourse obligation.
C. As a contra-asset to Accounts Receivable.
D. It is not recorded; it is only disclosed in the notes.

QUESTION 7: COMPREHENSIVE INCOME (OCI)

Which of the following items is included in Accumulated Other Comprehensive Income (AOCI) on the Balance Sheet?

A. Treasury Stock
B. Unrealized gains on Trading Securities
C. Foreign currency translation adjustments
D. Retained Earnings

QUESTION 8: PP&E (IMPAIRMENT RECOVERY)

A company determines that a machine with a carrying value of $50,000 is impaired and writes it down to its fair value of $30,000. A year later, the fair value of the machine rises to $45,000. Under U.S. GAAP, the company should:

A. Recognize a gain of $15,000.
B. Recognize a gain of $5,000.
C. Not recognize any gain or recovery.
D. Restore the asset to $50,000.

QUESTION 9: FINANCIAL STATEMENT NOTES

Which of the following is a mandatory disclosure in the Notes to the Financial Statements?

A. Detailed biographies of all middle-management employees.
B. Significant accounting policies, such as the basis of consolidation and inventory methods.
C. A list of all competitors and their market shares.
D. Internal projections for the next five years’ sales.

QUESTION 10: BUSINESS COMBINATIONS (GOODWILL)

Alpha Corp acquires 100% of Beta Inc. for a cash payment of $1,200,000. At the date of acquisition, Beta’s balance sheet shows total assets of $1,500,000 and total liabilities of $600,000. An appraisal reveals that Beta’s equipment is undervalued by $100,000 and it has an unrecorded patent with a fair value of $50,000. What amount of Goodwill should Alpha Corp record?

A. $300,000
B. $150,000
C. $250,000
D. $450,000

Ready to Check Your Answers?

How did you do? If you found a few of these challenging, don’t worry—external financial reporting is a complex topic that requires practice.

To see the correct answers and read the in-depth rationale for why each option is right (or wrong), download our complete free CMA USA exam questions and answers PDF below!

Download Answers

Would you like me to write a short, catchy meta-description or a few social media captions to help drive traffic to this new blog post?