7/9/22, 3:34 PM CMA Exam Review - Part 1 - Assessment Review
Question 1
1.A.2.e
tb.inv.028_1805
LOS: 1.A.2.e
Lesson Reference: Inventory
Difficulty: medium
Bloom Code: 4
At Line Drive Apparel, practice jerseys are sold for $30. The disposal costs are $5 per jersey. The historical cost is $22 per jersey but the current
replacement cost is $20 per jersey. Line Drive Apparel's normal profit margin is 20% of the sale price. What is the net realizable value of each jersey that
Line Drive Apparel should use in the lower-of-cost-or-net-realizable-value (NRV) comparison?
$20
$22
Your Answer
$19
Correct
$25
Rationale
$20
This is replacement cost, not NRV. Therefore, this is an incorrect answer.
Rationale
$22
This answer is the historical cost, not the NRV. Therefore, this is an incorrect answer.
Rationale
$19
This is the NRV less expected profit margin, not the NRV itself. Therefore, this is an incorrect answer.
Rationale
$25
NRV is equal to selling price less costs to sell. In this example, the net realizable value is $25 ($30 − $5).Therefore, this is the correct answer.
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,7/9/22, 3:34 PM CMA Exam Review - Part 1 - Assessment Review
Question 2
1.A.2.a
tb.recv.016_0820
LOS: 1.A.2.a
Lesson Reference: Receivables
Difficulty: medium
Bloom Code: 4
When using the allowance method, what should a firm do to record bad debt expense?
Debit estimated uncollectibles to both Bad Debt Expense and Allowance for Doubtful accounts through an adjusting entry at the end of each period.
Correct
Debit estimated uncollectibles to Bad Debt Expense and credit them to Allowance for Doubtful accounts through an adjusting entry at the end of each
accounting period.
Credit estimated uncollectibles to Bad Debt Expense and debit them to Allowance for Doubtful accounts through an adjusting entry at the end of each
period.
Credit estimated uncollectibles to both Bad Debt Expense and Allowance for Doubtful accounts through an adjusting entry at the end of each period.
Rationale
Debit estimated uncollectibles to both Bad Debt Expense and Allowance for Doubtful accounts through an adjusting entry at the end of
each period.
Under the allowance method an estimate is made of the dollar value of accounts receivable that will not be collected. This amount is used to
calculate bad debt expense for a period. The journal entry is a debit to bad debt expense and a credit to allowance for doubtful accounts. Debiting
allowance for doubtful accounts would increase the net realizable value of accounts receivable, not decrease it. In addition, the journal entry would
not balance. Therefore, this is an incorrect answer.
Rationale
Debit estimated uncollectibles to Bad Debt Expense and credit them to Allowance for Doubtful accounts through an adjusting entry at
the end of each accounting period.
Under the allowance method an estimate is made of the dollar value of accounts receivable that will not be collected. This amount is used to
calculate bad debt expense for a period. The journal entry is a debit to bad debt expense and a credit to allowance for doubtful accounts.
Therefore, this is the correct answer.
Rationale
Credit estimated uncollectibles to Bad Debt Expense and debit them to Allowance for Doubtful accounts through an adjusting entry at
the end of each period.
Under the allowance method an estimate is made of the dollar value of accounts receivable that will not be collected. This amount is used to
calculate bad debt expense for a period. The journal entry is a debit to bad debt expense and a credit to allowance for doubtful accounts. Crediting
bad debt expense would decrease expenses, not increase them. In addition, debiting allowance for doubtful accounts would increase the net
realizable value of accounts receivable, not decrease it. Therefore, this is an incorrect answer.
Rationale
Credit estimated uncollectibles to both Bad Debt Expense and Allowance for Doubtful accounts through an adjusting entry at the end of
each period.
Under the allowance method an estimate is made of the dollar value of accounts receivable that will not be collected. This amount is used to
calculate bad debt expense for a period. The journal entry is a debit to bad debt expense and a credit to allowance for doubtful accounts. Crediting
bad debt expense would decrease expenses, not increase them. In addition, the journal entry would not balance. Therefore, this is an incorrect
answer.
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,7/9/22, 3:34 PM CMA Exam Review - Part 1 - Assessment Review
Question 3
1.A.2.d
tb.inv.019_1805
LOS: 1.A.2.d
Lesson Reference: Inventory
Difficulty: medium
Bloom Code: 4
Assuming no beginning inventory, what is the trend of inventory prices if cost of goods sold computed when inventory is valued using the FIFO method
exceeds cost of goods sold when inventory is valued using the LIFO method?
Prices will remain unchanged.
Correct
Prices will decrease.
Your Answer
Prices will increase.
The price trend cannot be determined from the information given.
Rationale
Prices will remain unchanged.
FIFO uses the oldest prices when calculating cost of goods sold and the newest prices when calculating ending inventory. On the other hand, LIFO
uses the newest prices when calculating cost of goods sold and the oldest prices when calculating ending inventory. If prices remain unchanged,
then cost of goods sold under both methods will be the same. Therefore, this is an incorrect answer.
Rationale
Prices will decrease.
FIFO uses the oldest prices when calculating cost of goods sold and the newest prices when calculating ending inventory. On the other hand, LIFO
uses the newest prices when calculating cost of goods sold and the oldest prices when calculating ending inventory. If cost of goods sold under
FIFO is higher than cost of goods sold under LIFO, older prices must be higher than newer prices. In other words, prices have decreased. Therefore,
this is the correct answer.
Rationale
Prices will increase.
FIFO uses the oldest prices when calculating cost of goods sold and the newest prices when calculating ending inventory. On the other hand, LIFO
uses the newest prices when calculating cost of goods sold and the oldest prices when calculating ending inventory. If prices increased, then cost of
goods sold under LIFO would be higher, not lower. This is because the more recent (higher) prices would be used to calculate cost of goods sold
under LIFO. Therefore, this is an incorrect answer.
Rationale
The price trend cannot be determined from the information given.
FIFO uses the oldest prices when calculating cost of goods sold and the newest prices when calculating ending inventory. On the other hand, LIFO
uses the newest prices when calculating cost of goods sold and the oldest prices when calculating ending inventory. If cost of goods sold under
FIFO is higher than cost of goods sold under LIFO, older prices must be higher than newer prices. In other words, prices have decreased. Therefore,
this is an incorrect answer.
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, 7/9/22, 3:34 PM CMA Exam Review - Part 1 - Assessment Review
Question 4
1.A.2.a
aq.rec.001_1802
LOS: 1.A.2.a
Lesson Reference: Receivables
Difficulty: easy
Bloom Code: 2
A company is in its first year of operations and has never written off any accounts receivable as uncollectible. When the allowance method of recognizing
bad debt expense is used, the entry to recognize that expense:
Increases net income.
Correct
Decreases current assets.
Has no effect on current assets.
Your Answer
Has no effect on net income.
Rationale
Increases net income.
This answer is incorrect. When an expense is recognized, that expense is debited. A debit to an expense decreases net income, rather than
increasing it.
Rationale
Decreases current assets.
This answer is correct. When the allowance method of recognizing bad debt expense is used, the journal entry is:
Bad debt expense xxx
Allowance for bad debts xxx
The allowance account is a contra account to accounts receivable. Since accounts receivable is a current asset, current assets will be decreased by
the allowance for bad debts.
Rationale
Has no effect on current assets.
This answer is incorrect. The allowance account is a contra account to accounts receivable. Since accounts receivable is a current asset, current
assets will be affected by the allowance for bad debts.
Rationale
Has no effect on net income.
This answer is incorrect. When an expense is recognized, that expense is debited. A debit to an expense decreases net income.
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Question 1
1.A.2.e
tb.inv.028_1805
LOS: 1.A.2.e
Lesson Reference: Inventory
Difficulty: medium
Bloom Code: 4
At Line Drive Apparel, practice jerseys are sold for $30. The disposal costs are $5 per jersey. The historical cost is $22 per jersey but the current
replacement cost is $20 per jersey. Line Drive Apparel's normal profit margin is 20% of the sale price. What is the net realizable value of each jersey that
Line Drive Apparel should use in the lower-of-cost-or-net-realizable-value (NRV) comparison?
$20
$22
Your Answer
$19
Correct
$25
Rationale
$20
This is replacement cost, not NRV. Therefore, this is an incorrect answer.
Rationale
$22
This answer is the historical cost, not the NRV. Therefore, this is an incorrect answer.
Rationale
$19
This is the NRV less expected profit margin, not the NRV itself. Therefore, this is an incorrect answer.
Rationale
$25
NRV is equal to selling price less costs to sell. In this example, the net realizable value is $25 ($30 − $5).Therefore, this is the correct answer.
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,7/9/22, 3:34 PM CMA Exam Review - Part 1 - Assessment Review
Question 2
1.A.2.a
tb.recv.016_0820
LOS: 1.A.2.a
Lesson Reference: Receivables
Difficulty: medium
Bloom Code: 4
When using the allowance method, what should a firm do to record bad debt expense?
Debit estimated uncollectibles to both Bad Debt Expense and Allowance for Doubtful accounts through an adjusting entry at the end of each period.
Correct
Debit estimated uncollectibles to Bad Debt Expense and credit them to Allowance for Doubtful accounts through an adjusting entry at the end of each
accounting period.
Credit estimated uncollectibles to Bad Debt Expense and debit them to Allowance for Doubtful accounts through an adjusting entry at the end of each
period.
Credit estimated uncollectibles to both Bad Debt Expense and Allowance for Doubtful accounts through an adjusting entry at the end of each period.
Rationale
Debit estimated uncollectibles to both Bad Debt Expense and Allowance for Doubtful accounts through an adjusting entry at the end of
each period.
Under the allowance method an estimate is made of the dollar value of accounts receivable that will not be collected. This amount is used to
calculate bad debt expense for a period. The journal entry is a debit to bad debt expense and a credit to allowance for doubtful accounts. Debiting
allowance for doubtful accounts would increase the net realizable value of accounts receivable, not decrease it. In addition, the journal entry would
not balance. Therefore, this is an incorrect answer.
Rationale
Debit estimated uncollectibles to Bad Debt Expense and credit them to Allowance for Doubtful accounts through an adjusting entry at
the end of each accounting period.
Under the allowance method an estimate is made of the dollar value of accounts receivable that will not be collected. This amount is used to
calculate bad debt expense for a period. The journal entry is a debit to bad debt expense and a credit to allowance for doubtful accounts.
Therefore, this is the correct answer.
Rationale
Credit estimated uncollectibles to Bad Debt Expense and debit them to Allowance for Doubtful accounts through an adjusting entry at
the end of each period.
Under the allowance method an estimate is made of the dollar value of accounts receivable that will not be collected. This amount is used to
calculate bad debt expense for a period. The journal entry is a debit to bad debt expense and a credit to allowance for doubtful accounts. Crediting
bad debt expense would decrease expenses, not increase them. In addition, debiting allowance for doubtful accounts would increase the net
realizable value of accounts receivable, not decrease it. Therefore, this is an incorrect answer.
Rationale
Credit estimated uncollectibles to both Bad Debt Expense and Allowance for Doubtful accounts through an adjusting entry at the end of
each period.
Under the allowance method an estimate is made of the dollar value of accounts receivable that will not be collected. This amount is used to
calculate bad debt expense for a period. The journal entry is a debit to bad debt expense and a credit to allowance for doubtful accounts. Crediting
bad debt expense would decrease expenses, not increase them. In addition, the journal entry would not balance. Therefore, this is an incorrect
answer.
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,7/9/22, 3:34 PM CMA Exam Review - Part 1 - Assessment Review
Question 3
1.A.2.d
tb.inv.019_1805
LOS: 1.A.2.d
Lesson Reference: Inventory
Difficulty: medium
Bloom Code: 4
Assuming no beginning inventory, what is the trend of inventory prices if cost of goods sold computed when inventory is valued using the FIFO method
exceeds cost of goods sold when inventory is valued using the LIFO method?
Prices will remain unchanged.
Correct
Prices will decrease.
Your Answer
Prices will increase.
The price trend cannot be determined from the information given.
Rationale
Prices will remain unchanged.
FIFO uses the oldest prices when calculating cost of goods sold and the newest prices when calculating ending inventory. On the other hand, LIFO
uses the newest prices when calculating cost of goods sold and the oldest prices when calculating ending inventory. If prices remain unchanged,
then cost of goods sold under both methods will be the same. Therefore, this is an incorrect answer.
Rationale
Prices will decrease.
FIFO uses the oldest prices when calculating cost of goods sold and the newest prices when calculating ending inventory. On the other hand, LIFO
uses the newest prices when calculating cost of goods sold and the oldest prices when calculating ending inventory. If cost of goods sold under
FIFO is higher than cost of goods sold under LIFO, older prices must be higher than newer prices. In other words, prices have decreased. Therefore,
this is the correct answer.
Rationale
Prices will increase.
FIFO uses the oldest prices when calculating cost of goods sold and the newest prices when calculating ending inventory. On the other hand, LIFO
uses the newest prices when calculating cost of goods sold and the oldest prices when calculating ending inventory. If prices increased, then cost of
goods sold under LIFO would be higher, not lower. This is because the more recent (higher) prices would be used to calculate cost of goods sold
under LIFO. Therefore, this is an incorrect answer.
Rationale
The price trend cannot be determined from the information given.
FIFO uses the oldest prices when calculating cost of goods sold and the newest prices when calculating ending inventory. On the other hand, LIFO
uses the newest prices when calculating cost of goods sold and the oldest prices when calculating ending inventory. If cost of goods sold under
FIFO is higher than cost of goods sold under LIFO, older prices must be higher than newer prices. In other words, prices have decreased. Therefore,
this is an incorrect answer.
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, 7/9/22, 3:34 PM CMA Exam Review - Part 1 - Assessment Review
Question 4
1.A.2.a
aq.rec.001_1802
LOS: 1.A.2.a
Lesson Reference: Receivables
Difficulty: easy
Bloom Code: 2
A company is in its first year of operations and has never written off any accounts receivable as uncollectible. When the allowance method of recognizing
bad debt expense is used, the entry to recognize that expense:
Increases net income.
Correct
Decreases current assets.
Has no effect on current assets.
Your Answer
Has no effect on net income.
Rationale
Increases net income.
This answer is incorrect. When an expense is recognized, that expense is debited. A debit to an expense decreases net income, rather than
increasing it.
Rationale
Decreases current assets.
This answer is correct. When the allowance method of recognizing bad debt expense is used, the journal entry is:
Bad debt expense xxx
Allowance for bad debts xxx
The allowance account is a contra account to accounts receivable. Since accounts receivable is a current asset, current assets will be decreased by
the allowance for bad debts.
Rationale
Has no effect on current assets.
This answer is incorrect. The allowance account is a contra account to accounts receivable. Since accounts receivable is a current asset, current
assets will be affected by the allowance for bad debts.
Rationale
Has no effect on net income.
This answer is incorrect. When an expense is recognized, that expense is debited. A debit to an expense decreases net income.
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