CMA Part 1 Volume 1: Sections A – C

Table of Contents Introduction to CMA Part 1 ............................................................................................... 1 Section A – External Financial Reporting Decisions...................................................... 3 A.1. Financial Statements ................................................................................................. 3 Users of Financial Information 3 The Financial Statements 4 Differences Between IFRS and U.S. GAAP 4 1) The Balance Sheet (Statement of Financial Position) 5 2) The Income Statement 13 3) Introduction to the Statement of Cash Flows (SCF) 18 4) Statement of Comprehensive Income 19 5) Statement of Changes in Stockholders’ Equity 23 Notes to the Financial Statements 24 Preparation of the Statement of Cash Flows 26 A.1.5 Integrated Reporting.............................................................................................. 43 Introduction to Integrated Reporting 43 The International IR Framework 45 Sustainability Accounting Standards Board (SASB) 55 A.2. Recognition, Measurement, Valuation, and Disclosure........................................ 56 1) Asset Valuation............................................................................................................ 56 1a) Cash and Cash Equivalents...................................................................................... 56 Cash 56 Cash Equivalents 57 1b) Accounts Receivable ................................................................................................ 58 Valuing Accounts Receivable 58 Discounts and Initial Recording of the Account Receivable 58 Credit Losses on Receivables 61 Sales Returns and Allowances 71 Factoring: Using Receivables as an Immediate Source of Cash 71 1c) Inventory .................................................................................................................... 72 Valuing the Inventory When It Is Purchased 72 Which Goods Are Included in Inventory? 73 Costs Included in Inventory 74 Determining Which Item Is Sold: Cost Flow Assumptions 75 Effect of the Different Methods 79 The Frequency of Determining Inventory Balances 79 The Physical Inventory Count 85 Errors in Inventory 86 Table of Contents CMA Part 1 ii © 2019 HOCK international, LLC. 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Recognizing Permanent Declines in Inventory Values 88 1d) Investments ............................................................................................................... 93 Investments in Debt Securities – Methods 1, 2, and 3 95 The Fair Value Option for Investments in Debt Securities 96 Investments in Equity Securities – Methods 3, 4, 5, and 6 97 Investments Where the Investor Does Not Have Significant Influence 97 Long-Term Investments Where the Investor Has Significant Influence or Control 100 Changes in Level of Ownership or Degree of Influence 103 Consolidated Financial Statements – Method 6 103 1e) Property, Plant, and Equipment ............................................................................. 107 Initial Recording of the Fixed Asset 107 Depreciation 108 Net Book Value of Fixed Assets 108 Calculation of Depreciation 108 Depreciation Methods 109 Depreciation for Tax Purposes 112 Which Method of Depreciation is Best? 114 Impairment of Long-Lived Assets to be Held and Used 114 1f) Intangible Assets ..................................................................................................... 116 Initial Recording of Intangible Assets 116 Amortization and Accounting Treatment of Intangibles 117 Impairment of Limited-Life Intangible Assets 118 Impairment of Indefinite-Lived Intangible Assets Other Than Goodwill 118 Goodwill and the Impairment of Goodwill 119 2) Valuation of Liabilities .............................................................................................. 120 2a) Reclassification of Short-term Debt ...................................................................... 120 2b) Warranty Liabilities ................................................................................................. 121 1) Accounting for Assurance-Type Warranties 122 2) Accounting for Service-Type Warranties 124 2c) Accounting for Income Taxes ................................................................................ 126 Book Income, Taxable Income, and Deferred Taxes 128 Temporary Timing Differences 130 Permanent Timing Differences 132 2d) Accounting for Leases ........................................................................................... 133 Definition of a Lease 134 The Two Categories of Leases 134 3) Equity Transactions .................................................................................................. 137 Corporate Shareholders’ Equity 138 Retained Earnings 145 Treasury Stock 145 CMA Part 1 Table of Contents © 2019 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited. iii Classification of Shares 145 4) Income Statement...................................................................................................... 147 4a) Revenue Recognition.............................................................................................. 147 Contract Assets and Liabilities 147 Five Steps to Revenue Recognition 149 Special Revenue Recognition Issues 153 Disclosures for Revenue Recognition 163 4b) Income Measurement.............................................................................................. 165 Expense Recognition 165 Gains and Losses 166 Gains and Losses on the Disposal of Fixed Assets 166 Presentation of Gains and Losses on the Income Statement 168 Involuntary Disposals 168 Comprehensive Income 169 Section B – Planning, Budgeting and Forecasting..................................................... 170 B.1. Strategic Planning.................................................................................................. 171 Planning in Order to Achieve Superior Performance 171 Types of Plans and General Principles 173 The Strategic Planning Process 176 Other Planning Tools and Techniques 195 Characteristics of Successful Strategic Plans 199 B.2. Budgeting Concepts .............................................................................................. 202 The Relationship Among Planning, Budgeting, and Performance Evaluation 202 Advantages of Budgets 203 Time Frames for Budgets 205 Methods of Developing the Budget 206 Who Should Participate in the Budgeting Process? 208 The Budget Development Process 208 Budgetary Slack and Its Impact on Goal Congruence 210 Responsibility Centers and Controllable Costs 210 Standard Costs Used in Budgeting 211 B.3. Forecasting Techniques........................................................................................ 221 Using Linear Regression Analysis in Forecasting 221 Using Learning Curves in Forecasting 228 Using Probability Concepts in Forecasting 236 B.4. Budget Methodologies .......................................................................................... 241 The Annual/Master Budget 241 Static Budgets and Flexible Budgets 242 Project Budgeting 245 Table of Contents CMA Part 1 iv © 2019 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited. Activity-Based Budgeting (ABB) 246 Zero-Based Budgeting versus Incremental Budgeting 248 Continuous (Rolling) Budgets 248 B.5. Annual Profit Plan and Supporting Schedules.................................................... 249 The Budgeting Cycle 249 Development of the Annual/Master Budget or Profit Plan 250 Development of the Master Budget 251 The Master Budget Financial Statements 262 Ongoing Budget Reports 264 Answering Budgeting Exam Questions ...................................................................... 265 Flexible Budgeting Questions 267 Units to Produce / Purchase Questions 269 Cash Budget Questions 273 B.6. Top-Level Planning and Analysis......................................................................... 275 Pro Forma Financial Statements 275 Analysis of Pro Forma Financial Statements 286 Other Uses of Pro Forma Financial Statements 288 Section C – Performance Management ....................................................................... 289 C.1. Cost and Variance Measures ................................................................................ 290 Determining the Level of Activity for Standard Costs 291 Sources of Standards 292 Variance Analysis Concepts ........................................................................................ 294 “Levels” in Variance Analysis 294 Static Budget Variances vs. Flexible Budget Variances 294 Manufacturing Input Variances .................................................................................... 301 The Difference Between Sales Variances and Production Variances 301 What Causes Manufacturing Input Variances? 302 Direct Materials Variances 303 Direct Labor Variances 309 More Than One Material Input or One Labor Class 312 Factory Overhead Variances 325 Sales Variances ............................................................................................................. 349 Sales Variances for a Single-Product Company 350 Sales Variances When More than One Product is Sold 356 Variances Example for a Multiple-Product Company Using Contribution Margin 364 Variance Analysis for a Service Company .................................................................. 368 Market Variances........................................................................................................... 376 C.2. Responsibility Centers and Reporting Segments............................................... 378 Evaluating the Manager vs. Evaluating the Business Unit 379 CMA Part 1 Table of Contents © 2019 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited. v Allocation of Common Costs 380 The Contribution Income Statement Approach to Evaluation 382 Transfer Pricing 386 C.3. Performance Measures.......................................................................................... 395 Strategic Issues in Performance Measurement 395 Performance Measurement 396 Balanced Scorecard 407 Customer and Product Profitability Analysis 414 Appendix A – Time Value of Money Concepts (Present/Future Value)..................... 417 Simple Interest 417 Compound Interest 418 Present Value 419 Future Value 425 Appendix B: Variance Report for a Company Selling Two Products........................ 434 Answers to Questions................................................................................................... 438