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Wiley CMAexcel Learning System Exam Review 2015

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About IMA® (Institute of Management Accountants)

IMA®, the association of accountants and financial professionals in business, is one of the largest and most respected associations focused exclusively on advancing the management accounting profession. Globally, IMA supports the profession through research, the CMA® (Certified Management Accountant) program, continuing education, networking, and advocacy of the highest ethical business practices. IMA has a global network of more than 65,000 members in 120 coun-tries and 300 local chapter communities. IMA provides localized ser-vices through its offices in Montvale, NJ, USA; Zurich, Switzerland; Dubai, UAE; and Beijing, China. For more information about IMA, please visit www.imanet.org.

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Wiley CMAexcel Learning System Exam Review 2015 Self-Study GuidePart 2: Financial Decision Making

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Cover Design by: David RiedyCover image: © iStock.com/turtleteeth

Copyright © 2014 by Institute of Management Accountants. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

These materials are copyrighted and may not be reproduced in any form or used in any way to create derivative works. Any reproduction, reuse, or distribution of CMA Learning System® materials without prior written permission from the Institute of Management Accountants (IMA) is illegal and a material violation of the IMA Statement of Ethical Professional Practice.

Any Certified Management Accountant (CMA) or CMA candidate who reproduces, reuses, or distributes CMA Learning System® materials or content in any form without prior authorization from IMA is subject to legal action and will be reported to the Institute of Certified Management Accountants (ICMA) and immediately expelled from the IMA and CMA program.

It is your responsibility to ensure that any CMA exam review materials that you are using have been provided to you through authorized channels or personnel. If you are in doubt about the authenticity of your materials or question the means by which they have been provided to you, contact IMA customer service at (800) 638-4427 in the U.S. or +1 (201) 573-9000.

This material is designed for learning purposes and is distributed with the understanding that the publisher and authors are not offering legal or professional services.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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Library of Congress Cataloging-in-Publication Data

Wiley CMAexcel exam review learning system. v. cm. Contents: pt. 1. Financial reporting, planning, performance, and control—pt. 2. Financial decision making. Includes bibliographical references and index. ISBN 978-1-118-95616-8 (Part 1, 1-year access) ISBN 978-1-118-95618-2 (Part 2, 1-year access) ISBN 978-1-118-99529-7 (Part 1, 2-year access) ISBN 978-1-118-99533-4 (Part 2, 2-year access) ISBN 978-1-118-95615-1 (Part 1, no pin) ISBN 978-1-118-95617-5 (Part 2, no pin) ISBN 978-1-118-95624-3 (Part 1 + OIR, 1-year access) ISBN 978-1-118-95625-0 (Part 2 + OIR, 1-year access) ISBN 978-1-118-99535-8 (Part 1 + OIR, 2-year access) ISBN 978-1-118-99542-6 (Part 2 + OIR, 2-year access) 1. Accounting—Examinations—Study guides. 2. Accounting—Examinations, questions, etc. I. Title: Wiley Certified Management Accountant exam review learning system. II. Title: CMA exam review learning system. HF5661.W499 2014 657.076—dc23 2012022854Printed in the United States of America

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v

Contents

Acknowledgments of Subject Matter Experts ix

Candidate Study Information xi

How to Use the Wiley CMAexcel Learning System xv

Create a Study Plan xix

Introduction 1

Section A Financial Statement Analysis 3

Topic 1: Basic Financial Statement Analysis 19

Topic 2: Financial Ratios 27

Topic 3: Profitability Analysis 49

Topic 4: Special Issues 73

Practice Questions: Financial Statement Analysis 93

Section B Corporate Finance 103

Topic 1: Risk and Return 129

Topic 2: Long-Term Financial Management 149

Topic 3: Raising Capital 205

Topic 4: Working Capital Management 223

Topic 5: Corporate Restructuring 257

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Topic 6: International Finance 267

Practice Questions: Corporate Finance 287

Section C Decision Analysis 293

Topic 1: Cost/Volume/Profit Analysis 305

Topic 2: Marginal Analysis 327

Topic 3: Pricing 343

Practice Questions: Decision Analysis 372

Section D Risk Management 383

Topic 1: Enterprise Risk 389

Practice Questions: Risk Management 404

Section E Investment Decisions 407

Topic 1: Capital Budgeting Process 415

Topic 2: Discounted Cash Flow Analysis 431

Topic 3: Payback and Discounted Payback 445

Topic 4: Risk Analysis in Capital Investment 451

Practice Questions: Investment Decisions 461

Section F Professional Ethics 469

Topic 1: Ethical Considerations for Management Accounting and Financial Management Professionals 479

Topic 2: Ethical Considerations for the Organization 493

Practice Questions: Professional Ethics 507

vi Contents

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Contents vii

Essay Exam Support Materials 509

Essay Exam Study Tips 512

Examples of Essay Question Answers 514

Practice Essay Questions and Answers 524

Answers to Section Practice Questions 629

Appendix A: Time Value of Money Tables 685

Appendix B: ICMA Learning Outcome Statements—Part 2 689

Bibliography and References 703

Index 707

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ix

Acknowledgments of Subject Matter Experts

The Wiley CMAexcel Learning System (WCMALS) content is written to help explain the concepts and calculations from the Certified Management

Accountant (CMA) exam Learning Outcome Statements (LOS) published by the Institute of Certified Management Accountants (ICMA).

IMA would like to acknowledge the team of subject matter experts who worked together in conjunction with IMA staff to produce this version of the WCMALS.

Lynn Clements, DBA, CMA, CFM, CPA, Cr. FA, CFE, is a professor of account-ing at Florida Southern College in Lakeland, Florida. She earned her Ph.D. in busi-ness administration with an accounting concentration from Nova Southeastern University. Clements has been a member of the Institute of Management Accountants since 1990. She has published many research articles and regularly teaches continu-ing professional education courses to the accounting community.

Saurav Dutta, CMA, is an associate professor and former chair of the Accounting Department at the State University of New York at Albany. Dutta is the author of some 20 research articles published in various academic journals. He received his Ph.D. in accounting from the University of Kansas and is also the recipient of the Robert Beyer Silver Medal for securing the second highest total score in a CMA examination.

Tony Griffin, CMA, is the accounting manager for Dayton Aerospace, Inc., a senior management consulting firm specializing in defense acquisition and logistics sup-port to government and industry customers. Griffin has been actively involved in supporting the IMA and the CMA certification by serving as president of his local IMA chapter and by organizing and leading CMA review courses in the Dayton, Ohio, area.

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x Acknowledgments of Subject Matter Experts

Karen L. Jett, CMA, is a consultant specializing in values-based organiza-tional development and ethics training. Prior to starting her own business (Jett Excellence), she acquired over two decades of experience working in privately held companies and holds a degree in accounting from Temple University (Philadelphia, PA). Jett is author of Grow Your People, Grow Your Business (Mira Digital, 2008) and Questioning Ethics, an innovative ethics training system designed specifically for smaller businesses. She has taught the CMA Review Courses for many years, both as an adjunct professor at Villanova University (Villanova, PA) and directly to corporate clients.

Jan Kooiman, CMA, holds a doctorate in business economics from the University of Amsterdam. He worked for an accounting and audit firm before stepping into the professional world as chief financial officer and board member of an international company. Kooiman is a qualified transactional Six Sigma Black Belt and Trainer and is adjunct professor of finance, business, and wccounting at the Webster and Leiden University in the Netherlands, teaching MBA Finance and Management Accounting. He is also the program manager and instructor of the CMA program at the World Trade Center Amsterdam.

Lou Petro, CMA, CPA, CGMA, CIA, CCP, CISA, CFE, CFM, PE, is a senior man-ager with a major fraud investigation firm and a former consultant and auditor. Petro specializes in fraud deterrence and investigation, corporate governance, bankruptcy, information systems auditing, production and inventory controls, internal controls, and cost and managerial accounting. He has also taught auditing, systems, accounting, and finance courses at colleges and universities in Michigan and Ontario.

Tara Shawver, DBA, CMA, is an associate professor of accounting at King’s College (Wilkes-Barre, PA). She earned her Ph.D. in business administration with an accounting concentration from Nova Southeastern University. Shawver has been an active member of the Institute of Management Accountants since 2003. She is an active volunteer with the IMA, serving as president of the Pennsylvania Northeast Chapter. She has published many research articles and frequently presents at IMA’s Annual Conference and Exhibition and the American Accounting Association.

Siaw-Peng Wan, CFA, is a professor of finance and the MBA program direc-tor at Elmhurst College (Elmhurst, IL). He received his Ph.D. in economics from the University of Illinois at Urbana-Champaign, and he recently became a CFA charter holder. His most recent articles on online investing and banking have appeared in The Internet Encyclopedia and The Handbook of Information Security. Wan has taught CMA Review Courses at Northern Illinois University since 2004.

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xi

Candidate Study Information

CMA Certification from ICMA

The Certified Management Accountant (CMA) certification provides accountants and financial professionals with an objective measure of knowledge and compe-tence in the field of management accounting. The CMA designation is recognized globally as an invaluable credential for professional accountancy advancement inside organizations and for broadening professional skills and perspectives.

The two-part CMA exam is designed to develop and measure critical-thinking and decision-making skills and to meet these objectives:

• To establish management accounting and financial management as recog-nized professions by identifying the role of the professional, the underly-ing body of knowledge, and a course of study by which such knowledge is acquired.

• To encourage higher educational standards in the management accounting and financial management fields.

• To establish an objective measure of an individual’s knowledge and competence in the fields of management accounting and financial management.

• To encourage continued professional development.

Individuals earning the CMA designation benefit by being able to:

• Communicate their broad business competency and strategic financial mastery.• Obtain contemporary professional knowledge and develop skills and abilities

that are valued by successful businesses.• Convey their commitment to an exemplary standard of excellence that is

grounded on a strong ethical foundation and lifelong learning.• Enhance their career development, salary qualifications, and professional pro-

motion opportunities.

The CMA certification is granted exclusively by the Institute of Certified Management Accountants (ICMA).

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xii Candidate Study Information

CMA Learning Outcome Statements (LOS)

The Certified Management Accountant exam is based on a series of Learning Outcome Statements (LOS) developed by the Institute of Certified Management Accountants (ICMA). The LOS describes the knowledge and skills that make up the CMA body of knowledge, broken down by part, section, and topic. The Wiley CMAexcel Learning System (WCMALS) supports the LOS by addressing the sub-jects they cover. Candidates should use the LOS to ensure they can address the concepts in different ways or through a variety of question scenarios. Candidates should also be prepared to perform calculations referred to in the LOS in total or by providing missing components of a calculation. The LOS should not be used as proxies for exact exam questions; they should be used as a guide for studying and learning the content that will be covered on the exam.

A copy of the ICMA Learning Outcome Statements is included in Appendix B at the end of this book. Candidates are also encouraged to visit the IMA website to find other exam-related information at www.imanet.org.

CMA Exam Format

The content tested on the CMA exams is at an advanced level—which means that the passing standard is set for mastery, not minimum competence. Thus, there will be test questions for all major topics that require the candidate to synthesize infor-mation, evaluate a situation, and make recommendations. Other questions will test subject comprehension and analysis. However, compared to previous versions, this CMA exam will have an increased emphasis on the higher-level questions.

The content is based on a series of LOS that define the competencies and capa-bilities expected of a management accountant.

There are two exams, taken separately: Part 1: Financial Reporting, Planning, Performance, and Control, and Part 2: Financial Decision Making. Each exam is four hours in length and includes multiple-choice and essay questions. One hun-dred multiple-choice questions are presented first, followed by two essay ques-tions. All of these questions— multiple-choice and essay—can address any of the LOS for the respective exam part. Therefore, your study plan should include learning the content of the part as well as practicing how to answer multiple-choice and essay questions against that content. The study plan tips and the final section of this WCMALS book contains important information to help you learn how to approach the different types of questions.

Note on Candidate Assumed Knowledge

The CMA exam content is based on a set of assumed baseline knowledge that candidates are expected to have. Assumed knowledge includes economics, basic

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Candidate Study Information xiii

statistics, and financial accounting. Examples of how this assumed knowledge might be tested in the exam include:

• How to calculate marginal revenue and costs as well as understand the rel-evance of market structures when determining prices

• How to calculate variance when managing financial risk• How to construct a cash flow statement as part of an analysis of transactions

and assess the impact of the transactions on the financial statements

Please note that prior courses in accounting and finance are highly recom-mended to ensure this knowledge competency when preparing for the exam.

Overall Expectations for the CMA Candidates

Completing the CMA exams requires a high level of commitment and dedication of up to 150 hours of study for each part of the CMA exam. Completing the two-part exam is a serious investment that will reap many rewards, helping you to build a solid foundation for your career, distinguish yourself from other accountants, and enhance your career in ways that will pay dividends for a lifetime.

Your success in completing these exams will rest heavily on your ability to create a solid study plan and to execute that plan. IMA offers many resources, tools, and programs to support you during this process—the exam content speci-fications, assessment tools to identify the content areas you need to study most, comprehensive study tools such as the Online Test Bank, classroom programs, and online intensive review courses. We encourage you to register as a CMA candidate as soon as you begin the program to maximize your access to these resources and tools and to draw on these benefits with rigor and discipline that best supports your unique study needs. We also suggest candidates seek other sources if further knowledge is needed to augment knowledge and understanding of the ICMA LOS.

For more information about the CMA certification, the CMA exams, or the exam preparation resources offered through IMA, visit www.imanet.org.

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