CMA EXAM PRACTICE QUESTIONS &
VERIFIED ANSWERS
150 Comprehensive Multiple-Choice Questions with Full Explanations
Section 1: External Financial Reporting Decisions
(Q1–Q25)
Q1: Which financial statement component reports an enterprise's cash receipts and cash
payments categorized by operating, investing, and financing activities over a specified
period?
A. Statement of Financial Position
B. Statement of Cash Flows
C. Statement of Changes in Equity
D. Statement of Comprehensive Income
Correct Answer: B. Statement of Cash Flows
Explanation: The Statement of Cash Flows isolates liquidity changes across operating,
investing, and financing activities. Operating activities reflect core revenue generation, investing
activities cover long-term assets, and financing activities reflect debt and equity transactions.
Q2: Under US GAAP, how should revenue be recognized when a performance obligation
is satisfied over time?
A. When the customer makes the final payment upon contract completion
B. Based on the proportion of work completed using an appropriate input or output method
C. Only when all goods have been physically delivered to the buyer's destination
D. Upfront on the date the initial contract is signed by both parties
Correct Answer: B. Based on the proportion of work completed using an appropriate input or
output method
Explanation: ASC 606 mandates revenue recognition over time as performance obligations are
satisfied, using input methods (e.g., costs incurred) or output methods (e.g., units delivered) that
reliably measure progress toward completion.
,Q3: What inventory costing method results in the highest net income during periods of
rising prices (inflation)?
A. Last-In, First-Out (LIFO)
B. First-In, First-Out (FIFO)
C. Weighted-Average Cost
D. Specific Identification
Correct Answer: B. First-In, First-Out (FIFO)
Explanation: FIFO assigns older, lower-cost inventory to Cost of Goods Sold (COGS), resulting
in lower expense and higher reported net income during inflationary periods. LIFO assigns
newer, higher-cost inventory to COGS, reducing net income.
Q4: How does a lessee record an operating lease on its Balance Sheet under ASC 842?
A. As a right-of-use asset and a corresponding lease liability
B. Only as an off-balance sheet operating expense commitment in footnote disclosures
C. As an intangible asset amortized over 40 years with no liability recognized
D. As accounts payable and prepaid inventory
Correct Answer: A. As a right-of-use asset and a corresponding lease liability
Explanation: ASC 842 requires lessees to recognize both a right-of-use (ROU) asset and a
lease liability measured at the present value of lease payments on the balance sheet for virtually
all leases longer than 12 months.
Q5: Which of the following items is included in Other Comprehensive Income (OCI) rather
than Net Income?
A. Gain on sale of equipment used in operations
B. Unrealized gains and losses on available-for-sale debt securities
C. Sales revenue from primary business operations
D. Interest expense on long-term corporate bonds
Correct Answer: B. Unrealized gains and losses on available-for-sale debt securities
Explanation: Other Comprehensive Income includes unrealized holding gains/losses on AFS
debt securities, foreign currency translation adjustments, and pension plan actuarial
gains/losses, bypassing current period net income until realized.
Q6: When testing a long-lived asset for impairment under US GAAP, what is the initial
step (recoverability test)?
A. Compare the asset's book value to its discounted future cash flows
B. Compare the carrying amount of the asset to the sum of undiscounted expected future cash
flows
,C. Immediately write down the asset to its historical original purchase price
D. Recognize an impairment loss equal to 10% of total assets
Correct Answer: B. Compare the carrying amount of the asset to the sum of undiscounted
expected future cash flows
Explanation: Under US GAAP, an asset is impaired if its carrying amount exceeds the
undiscounted expected future cash flows. If impaired, the loss is measured as the difference
between book value and fair market value.
Q7: How is goodwill accounted for after initial recognition under US GAAP for public
business entities?
A. Amortized straight-line over a 20-year useful life
B. Tested at least annually for impairment at the reporting unit level
C. Written off immediately as an extraordinary loss in the acquisition year
D. Revalued upward annually based on inflation adjustments
Correct Answer: B. Tested at least annually for impairment at the reporting unit level
Explanation: Goodwill is not amortized under US GAAP for public entities. Instead, it must be
evaluated for impairment at least annually, or more frequently if triggering events indicate fair
value may be below carrying amount.
Q8: Under the indirect method of preparing the Statement of Cash Flows, how is an
increase in Accounts Receivable adjusted to Net Income?
A. Added to Net Income in operating activities
B. Deducted from Net Income in operating activities
C. Reported as an investing cash outflow
D. Reported as a financing cash inflow
Correct Answer: B. Deducted from Net Income in operating activities
Explanation: An increase in Accounts Receivable indicates revenue was earned and included
in Net Income but cash has not yet been collected. Therefore, the increase must be deducted
from Net Income to adjust to cash operating flows.
Q9: What effect does issuing a 10% stock dividend have on total shareholders' equity?
A. Increases total shareholders' equity
B. Decreases total shareholders' equity
C. Has no effect on total shareholders' equity
D. Doubles total shareholders' equity
Correct Answer: C. Has no effect on total shareholders' equity
Explanation: A stock dividend reclassifies a portion of retained earnings into common stock
and additional paid-in capital accounts. Because the adjustment occurs entirely within equity
, components, total shareholders' equity remains unchanged.
Q10: Which financial ratio measures a company's ability to pay short-term obligations
using its most liquid current assets?
A. Current Ratio
B. Quick Ratio (Acid-Test Ratio)
C. Debt-to-Equity Ratio
D. Return on Equity
Correct Answer: B. Quick Ratio (Acid-Test Ratio)
Explanation: The Quick Ratio excludes less liquid assets like inventory and prepaid expenses
from current assets, focusing strictly on cash, marketable securities, and short-term receivables
divided by current liabilities.
Q11: Under ASC 321, how are equity investments without readily determinable fair values
reported if the measurement alternative is elected?
Answer: At cost, minus impairment, plus or minus observable price changes for identical or
similar investments.
Explanation: If fair value is not readily determinable, ASC 321 allows equity investments to be
measured at cost less impairment, adjusted for observable price changes in orderly transactions
for similar assets of the same issuer.
Q12: How are development costs treated under IFRS compared to US GAAP?
Answer: IFRS capitalizes development costs when specific technical and economic criteria are
met, whereas US GAAP expenses virtually all R&D costs as incurred.
Explanation: IAS 38 requires capitalization of development costs once technical feasibility,
intention, ability to complete, and future economic benefits are proven. US GAAP requires
expensing R&D (except software development costs after technological feasibility).
Q13: Which of the following events qualifies as a discontinued operation on the Income
Statement?
Answer: Disposal of a major line of business representing a strategic shift that has a major
effect on operations and financial results.
Explanation: To qualify as a discontinued operation under ASC 205-20, the disposal must
represent a strategic shift that has or will have a major effect on an entity's operations and
financial results, reported net of tax below continuing operations.
VERIFIED ANSWERS
150 Comprehensive Multiple-Choice Questions with Full Explanations
Section 1: External Financial Reporting Decisions
(Q1–Q25)
Q1: Which financial statement component reports an enterprise's cash receipts and cash
payments categorized by operating, investing, and financing activities over a specified
period?
A. Statement of Financial Position
B. Statement of Cash Flows
C. Statement of Changes in Equity
D. Statement of Comprehensive Income
Correct Answer: B. Statement of Cash Flows
Explanation: The Statement of Cash Flows isolates liquidity changes across operating,
investing, and financing activities. Operating activities reflect core revenue generation, investing
activities cover long-term assets, and financing activities reflect debt and equity transactions.
Q2: Under US GAAP, how should revenue be recognized when a performance obligation
is satisfied over time?
A. When the customer makes the final payment upon contract completion
B. Based on the proportion of work completed using an appropriate input or output method
C. Only when all goods have been physically delivered to the buyer's destination
D. Upfront on the date the initial contract is signed by both parties
Correct Answer: B. Based on the proportion of work completed using an appropriate input or
output method
Explanation: ASC 606 mandates revenue recognition over time as performance obligations are
satisfied, using input methods (e.g., costs incurred) or output methods (e.g., units delivered) that
reliably measure progress toward completion.
,Q3: What inventory costing method results in the highest net income during periods of
rising prices (inflation)?
A. Last-In, First-Out (LIFO)
B. First-In, First-Out (FIFO)
C. Weighted-Average Cost
D. Specific Identification
Correct Answer: B. First-In, First-Out (FIFO)
Explanation: FIFO assigns older, lower-cost inventory to Cost of Goods Sold (COGS), resulting
in lower expense and higher reported net income during inflationary periods. LIFO assigns
newer, higher-cost inventory to COGS, reducing net income.
Q4: How does a lessee record an operating lease on its Balance Sheet under ASC 842?
A. As a right-of-use asset and a corresponding lease liability
B. Only as an off-balance sheet operating expense commitment in footnote disclosures
C. As an intangible asset amortized over 40 years with no liability recognized
D. As accounts payable and prepaid inventory
Correct Answer: A. As a right-of-use asset and a corresponding lease liability
Explanation: ASC 842 requires lessees to recognize both a right-of-use (ROU) asset and a
lease liability measured at the present value of lease payments on the balance sheet for virtually
all leases longer than 12 months.
Q5: Which of the following items is included in Other Comprehensive Income (OCI) rather
than Net Income?
A. Gain on sale of equipment used in operations
B. Unrealized gains and losses on available-for-sale debt securities
C. Sales revenue from primary business operations
D. Interest expense on long-term corporate bonds
Correct Answer: B. Unrealized gains and losses on available-for-sale debt securities
Explanation: Other Comprehensive Income includes unrealized holding gains/losses on AFS
debt securities, foreign currency translation adjustments, and pension plan actuarial
gains/losses, bypassing current period net income until realized.
Q6: When testing a long-lived asset for impairment under US GAAP, what is the initial
step (recoverability test)?
A. Compare the asset's book value to its discounted future cash flows
B. Compare the carrying amount of the asset to the sum of undiscounted expected future cash
flows
,C. Immediately write down the asset to its historical original purchase price
D. Recognize an impairment loss equal to 10% of total assets
Correct Answer: B. Compare the carrying amount of the asset to the sum of undiscounted
expected future cash flows
Explanation: Under US GAAP, an asset is impaired if its carrying amount exceeds the
undiscounted expected future cash flows. If impaired, the loss is measured as the difference
between book value and fair market value.
Q7: How is goodwill accounted for after initial recognition under US GAAP for public
business entities?
A. Amortized straight-line over a 20-year useful life
B. Tested at least annually for impairment at the reporting unit level
C. Written off immediately as an extraordinary loss in the acquisition year
D. Revalued upward annually based on inflation adjustments
Correct Answer: B. Tested at least annually for impairment at the reporting unit level
Explanation: Goodwill is not amortized under US GAAP for public entities. Instead, it must be
evaluated for impairment at least annually, or more frequently if triggering events indicate fair
value may be below carrying amount.
Q8: Under the indirect method of preparing the Statement of Cash Flows, how is an
increase in Accounts Receivable adjusted to Net Income?
A. Added to Net Income in operating activities
B. Deducted from Net Income in operating activities
C. Reported as an investing cash outflow
D. Reported as a financing cash inflow
Correct Answer: B. Deducted from Net Income in operating activities
Explanation: An increase in Accounts Receivable indicates revenue was earned and included
in Net Income but cash has not yet been collected. Therefore, the increase must be deducted
from Net Income to adjust to cash operating flows.
Q9: What effect does issuing a 10% stock dividend have on total shareholders' equity?
A. Increases total shareholders' equity
B. Decreases total shareholders' equity
C. Has no effect on total shareholders' equity
D. Doubles total shareholders' equity
Correct Answer: C. Has no effect on total shareholders' equity
Explanation: A stock dividend reclassifies a portion of retained earnings into common stock
and additional paid-in capital accounts. Because the adjustment occurs entirely within equity
, components, total shareholders' equity remains unchanged.
Q10: Which financial ratio measures a company's ability to pay short-term obligations
using its most liquid current assets?
A. Current Ratio
B. Quick Ratio (Acid-Test Ratio)
C. Debt-to-Equity Ratio
D. Return on Equity
Correct Answer: B. Quick Ratio (Acid-Test Ratio)
Explanation: The Quick Ratio excludes less liquid assets like inventory and prepaid expenses
from current assets, focusing strictly on cash, marketable securities, and short-term receivables
divided by current liabilities.
Q11: Under ASC 321, how are equity investments without readily determinable fair values
reported if the measurement alternative is elected?
Answer: At cost, minus impairment, plus or minus observable price changes for identical or
similar investments.
Explanation: If fair value is not readily determinable, ASC 321 allows equity investments to be
measured at cost less impairment, adjusted for observable price changes in orderly transactions
for similar assets of the same issuer.
Q12: How are development costs treated under IFRS compared to US GAAP?
Answer: IFRS capitalizes development costs when specific technical and economic criteria are
met, whereas US GAAP expenses virtually all R&D costs as incurred.
Explanation: IAS 38 requires capitalization of development costs once technical feasibility,
intention, ability to complete, and future economic benefits are proven. US GAAP requires
expensing R&D (except software development costs after technological feasibility).
Q13: Which of the following events qualifies as a discontinued operation on the Income
Statement?
Answer: Disposal of a major line of business representing a strategic shift that has a major
effect on operations and financial results.
Explanation: To qualify as a discontinued operation under ASC 205-20, the disposal must
represent a strategic shift that has or will have a major effect on an entity's operations and
financial results, reported net of tax below continuing operations.
