SOLUTIONS MANUAL AND
COMPREHENSIVE TEST BANK
FUNDAMENTAL MANAGERIAL
ACCOUNTING CONCEPTS
10TH EDITION
AUTHORSHIP: Thomas Edmonds, Christopher Edmonds, Mark Edmonds, Philip Olds
EDITION: 10th Edition
SUBJECT: Advanced Managerial Accounting, Corporate Governance, and Strategic Decision
Making
DOCUMENT TYPE: Exhaustive Examination Set and Expert Solutions Manual
DATE: December 2025
Part I: Foundations of Management Accounting
and Corporate Governance
Question 1
Topic: The Institute of Management Accountants (IMA) Statement of Ethical Professional
Practice: Conflict Resolution Scenario: A senior management accountant at a publicly traded
firm discovers that the Divisional Vice President has been capitalizing routine maintenance
expenses to artificially inflate current period operating income. This manipulation effectively
shifts expenses to the balance sheet, enhancing short-term profit metrics used for executive
bonuses. The accountant verifies the discrepancy but fears retaliation. According to the IMA
Statement of Ethical Professional Practice, outline the precise, sequential procedure the
accountant must follow to resolve this ethical conflict, specifically addressing the hierarchy of
communication and the limitations on external disclosure.
Comprehensive Solution and Strategic Analysis: The resolution of this ethical dilemma is
governed strictly by the IMA Statement of Ethical Professional Practice, which provides a
structured framework for handling conflicts when organizational policies fail. The scenario
presents a violation of multiple standards: Integrity, by engaging in conduct that prejudices
ethical duties; Credibility, by failing to communicate information fairly and objectively; and
Competence, by failing to perform duties in accordance with technical standards.
The accountant must adhere to the following escalation protocol, as mandated by the IMA:
1. Internal Escalation (Immediate Supervisor): The initial step requires discussing the
issue with the immediate supervisor. However, a critical caveat exists: if the immediate
supervisor is involved in the unethical activity, the accountant must bypass that individual
and present the issue to the next level of management. In this scenario, if the Divisional
, Vice President is the immediate supervisor, the accountant must elevate the matter to the
Corporate Controller or CFO.
2. Chain of Command Escalation: If the issue remains unresolved after the initial
discussion, or if the supervisor is complicit, the accountant effectively climbs the
organizational ladder. This escalation can proceed up to the Audit Committee, the
Executive Committee, the Board of Directors, or the Board of Trustees. It is imperative
that the accountant does not skip levels unless the immediate superior is implicated,
ensuring the chain of command is respected where possible to maintain professional
order.
3. Confidential Consultation (IMA Ethics Helpline): To clarify the application of specific
ethical standards to this inventory manipulation case, the accountant should utilize the
IMA’s anonymous helpline. This resource allows for an objective, external perspective on
the "gray areas" of capitalization rules without violating the confidentiality standard, as the
discussion is privileged and identity-protected.
4. Legal Consultation: The accountant is advised to consult a personal attorney. This step
is distinct from reporting the crime; it is to understand the accountant's own legal
obligations and rights. This is particularly relevant regarding potential whistleblower
protections under regulations such as the Sarbanes-Oxley Act (SOX), which penalizes
retaliation against employees who report financial fraud.
5. External Reporting Limitations: Crucially, the IMA standard on Confidentiality generally
prohibits communicating the issue to authorities or individuals outside the organization
(such as the press or the SEC) unless there is a clear legal obligation to do so. The
accountant must not breach this confidentiality voluntarily without legal counsel
confirmation, as doing so could constitute an ethical violation itself.
Managerial Insight: The manipulation described—capitalizing expenses—is a classic method
of "earnings management." By moving costs from the Income Statement (Expense) to the
Balance Sheet (Asset), the manager artificially boosts Net Income and Assets simultaneously.
This distorts the Return on Investment (ROI) and profit margins, misleading stakeholders. The
Edmonds text emphasizes that managerial accounting data must be "decision-relevant," and
such distortions render the data useless for internal control and external valuation.
Question 2
Topic: Strategic Positioning: Cost Leadership vs. Product Differentiation Scenario: Two
companies, "BudgetBasics" and "LuxTech," compete in the consumer electronics market.
BudgetBasics pursues a Cost Leadership strategy, while LuxTech pursues Product
Differentiation. Contrast the primary roles of the management accountant in each firm,
identifying the specific performance metrics and accounting focuses that would differ between
the two environments.
Comprehensive Solution and Strategic Analysis: The role of the management accountant is
contingent upon the firm’s strategic positioning within the Porter framework. The accounting
system must reinforce the strategy, not merely record it.
Cost Leadership (BudgetBasics): For a firm like BudgetBasics, the competitive advantage lies
in becoming the lowest-cost producer. The management accountant serves as a guardian of
efficiency.
● Primary Focus: The accounting system acts as a rigorous control mechanism. The focus
is on Standard Costing and Variance Analysis. The accountant relentlessly tracks
unfavorable variances in direct materials and labor to identify waste.
, ● Key Metrics: The dashboard for BudgetBasics would prioritize efficiency metrics: Labor
Efficiency Variance, Material Price Variance, Inventory Turnover, and cost per unit.
● Strategic Risk: The accountant must ensure that cost-cutting does not erode quality to
the point where the product becomes unsalable. However, the bias is always toward cost
reduction.
Product Differentiation (LuxTech): LuxTech competes by offering unique features, superior
quality, or brand prestige. The management accountant serves as a value creator.
● Primary Focus: The accounting system focuses on Target Costing and Quality Costs.
While cost is important, it is secondary to value. The accountant tracks the "Cost of
Quality" (Prevention and Appraisal costs) to ensure that the premium price is justified by a
defect-free product.
● Key Metrics: The dashboard would highlight R&D effectiveness, Time-to-Market,
Customer Satisfaction scores, and Defect Rates (PPM). A favorable price variance
obtained by buying cheaper, lower-quality materials would be flagged as a negative
outcome at LuxTech because it threatens the differentiation strategy.
● Strategic Risk: The accountant must prevent "gold-plating"—adding features that cost
more than the customer is willing to pay. The focus is on the value proposition rather than
absolute cost minimization.
Managerial Insight: Edmonds notes that a common failure in management accounting is
applying a "one-size-fits-all" approach. Using a rigid cost-minimization accounting system in a
differentiation firm can stifle innovation. For instance, if LuxTech’s accountants deny R&D
funding because it exceeds a standard budget, they may destroy the firm's long-term
competitive advantage. Thus, the accounting system must be "strategy-congruent".
Question 3
Topic: The Horizontal Financial Statements Model: Equity Transactions Scenario: Utilizing the
Horizontal Financial Statements Model favored by Edmonds, analyze the financial impact of the
following transaction: The company issues 1,000 shares of common stock for $50,000 cash.
Detail the specific effects on the Balance Sheet equation, the Income Statement, and the
Statement of Cash Flows.
Comprehensive Solution and Strategic Analysis: The Horizontal Financial Statements Model
is a pedagogical tool central to the Edmonds text, designed to show the simultaneous effects of
transactions across all financial statements without getting lost in debits and credits.
Transaction Analysis:
1. Balance Sheet Effect: The accounting equation is Assets = Liabilities + Stockholders'
Equity.
○ Assets: The issuance of stock brings cash into the firm. Therefore, the Cash
account (an Asset) increases by $50,000.
○ Liabilities: There is no obligation to repay this amount (unlike a loan), so Liabilities
remain unchanged.
○ Stockholders' Equity: The ownership interest in the company increases. The
Common Stock account increases by $50,000.
○ Check: +50,000 \text{ (Assets)} = 0 \text{ (Liabilities)} + 50,000 \text{ (Equity)}. The
equation balances.
2. Income Statement Effect:
○ Revenue/Expense: Issuing stock is a financing transaction, not an operating
transaction. It does not represent earned revenue from goods or services, nor is it
COMPREHENSIVE TEST BANK
FUNDAMENTAL MANAGERIAL
ACCOUNTING CONCEPTS
10TH EDITION
AUTHORSHIP: Thomas Edmonds, Christopher Edmonds, Mark Edmonds, Philip Olds
EDITION: 10th Edition
SUBJECT: Advanced Managerial Accounting, Corporate Governance, and Strategic Decision
Making
DOCUMENT TYPE: Exhaustive Examination Set and Expert Solutions Manual
DATE: December 2025
Part I: Foundations of Management Accounting
and Corporate Governance
Question 1
Topic: The Institute of Management Accountants (IMA) Statement of Ethical Professional
Practice: Conflict Resolution Scenario: A senior management accountant at a publicly traded
firm discovers that the Divisional Vice President has been capitalizing routine maintenance
expenses to artificially inflate current period operating income. This manipulation effectively
shifts expenses to the balance sheet, enhancing short-term profit metrics used for executive
bonuses. The accountant verifies the discrepancy but fears retaliation. According to the IMA
Statement of Ethical Professional Practice, outline the precise, sequential procedure the
accountant must follow to resolve this ethical conflict, specifically addressing the hierarchy of
communication and the limitations on external disclosure.
Comprehensive Solution and Strategic Analysis: The resolution of this ethical dilemma is
governed strictly by the IMA Statement of Ethical Professional Practice, which provides a
structured framework for handling conflicts when organizational policies fail. The scenario
presents a violation of multiple standards: Integrity, by engaging in conduct that prejudices
ethical duties; Credibility, by failing to communicate information fairly and objectively; and
Competence, by failing to perform duties in accordance with technical standards.
The accountant must adhere to the following escalation protocol, as mandated by the IMA:
1. Internal Escalation (Immediate Supervisor): The initial step requires discussing the
issue with the immediate supervisor. However, a critical caveat exists: if the immediate
supervisor is involved in the unethical activity, the accountant must bypass that individual
and present the issue to the next level of management. In this scenario, if the Divisional
, Vice President is the immediate supervisor, the accountant must elevate the matter to the
Corporate Controller or CFO.
2. Chain of Command Escalation: If the issue remains unresolved after the initial
discussion, or if the supervisor is complicit, the accountant effectively climbs the
organizational ladder. This escalation can proceed up to the Audit Committee, the
Executive Committee, the Board of Directors, or the Board of Trustees. It is imperative
that the accountant does not skip levels unless the immediate superior is implicated,
ensuring the chain of command is respected where possible to maintain professional
order.
3. Confidential Consultation (IMA Ethics Helpline): To clarify the application of specific
ethical standards to this inventory manipulation case, the accountant should utilize the
IMA’s anonymous helpline. This resource allows for an objective, external perspective on
the "gray areas" of capitalization rules without violating the confidentiality standard, as the
discussion is privileged and identity-protected.
4. Legal Consultation: The accountant is advised to consult a personal attorney. This step
is distinct from reporting the crime; it is to understand the accountant's own legal
obligations and rights. This is particularly relevant regarding potential whistleblower
protections under regulations such as the Sarbanes-Oxley Act (SOX), which penalizes
retaliation against employees who report financial fraud.
5. External Reporting Limitations: Crucially, the IMA standard on Confidentiality generally
prohibits communicating the issue to authorities or individuals outside the organization
(such as the press or the SEC) unless there is a clear legal obligation to do so. The
accountant must not breach this confidentiality voluntarily without legal counsel
confirmation, as doing so could constitute an ethical violation itself.
Managerial Insight: The manipulation described—capitalizing expenses—is a classic method
of "earnings management." By moving costs from the Income Statement (Expense) to the
Balance Sheet (Asset), the manager artificially boosts Net Income and Assets simultaneously.
This distorts the Return on Investment (ROI) and profit margins, misleading stakeholders. The
Edmonds text emphasizes that managerial accounting data must be "decision-relevant," and
such distortions render the data useless for internal control and external valuation.
Question 2
Topic: Strategic Positioning: Cost Leadership vs. Product Differentiation Scenario: Two
companies, "BudgetBasics" and "LuxTech," compete in the consumer electronics market.
BudgetBasics pursues a Cost Leadership strategy, while LuxTech pursues Product
Differentiation. Contrast the primary roles of the management accountant in each firm,
identifying the specific performance metrics and accounting focuses that would differ between
the two environments.
Comprehensive Solution and Strategic Analysis: The role of the management accountant is
contingent upon the firm’s strategic positioning within the Porter framework. The accounting
system must reinforce the strategy, not merely record it.
Cost Leadership (BudgetBasics): For a firm like BudgetBasics, the competitive advantage lies
in becoming the lowest-cost producer. The management accountant serves as a guardian of
efficiency.
● Primary Focus: The accounting system acts as a rigorous control mechanism. The focus
is on Standard Costing and Variance Analysis. The accountant relentlessly tracks
unfavorable variances in direct materials and labor to identify waste.
, ● Key Metrics: The dashboard for BudgetBasics would prioritize efficiency metrics: Labor
Efficiency Variance, Material Price Variance, Inventory Turnover, and cost per unit.
● Strategic Risk: The accountant must ensure that cost-cutting does not erode quality to
the point where the product becomes unsalable. However, the bias is always toward cost
reduction.
Product Differentiation (LuxTech): LuxTech competes by offering unique features, superior
quality, or brand prestige. The management accountant serves as a value creator.
● Primary Focus: The accounting system focuses on Target Costing and Quality Costs.
While cost is important, it is secondary to value. The accountant tracks the "Cost of
Quality" (Prevention and Appraisal costs) to ensure that the premium price is justified by a
defect-free product.
● Key Metrics: The dashboard would highlight R&D effectiveness, Time-to-Market,
Customer Satisfaction scores, and Defect Rates (PPM). A favorable price variance
obtained by buying cheaper, lower-quality materials would be flagged as a negative
outcome at LuxTech because it threatens the differentiation strategy.
● Strategic Risk: The accountant must prevent "gold-plating"—adding features that cost
more than the customer is willing to pay. The focus is on the value proposition rather than
absolute cost minimization.
Managerial Insight: Edmonds notes that a common failure in management accounting is
applying a "one-size-fits-all" approach. Using a rigid cost-minimization accounting system in a
differentiation firm can stifle innovation. For instance, if LuxTech’s accountants deny R&D
funding because it exceeds a standard budget, they may destroy the firm's long-term
competitive advantage. Thus, the accounting system must be "strategy-congruent".
Question 3
Topic: The Horizontal Financial Statements Model: Equity Transactions Scenario: Utilizing the
Horizontal Financial Statements Model favored by Edmonds, analyze the financial impact of the
following transaction: The company issues 1,000 shares of common stock for $50,000 cash.
Detail the specific effects on the Balance Sheet equation, the Income Statement, and the
Statement of Cash Flows.
Comprehensive Solution and Strategic Analysis: The Horizontal Financial Statements Model
is a pedagogical tool central to the Edmonds text, designed to show the simultaneous effects of
transactions across all financial statements without getting lost in debits and credits.
Transaction Analysis:
1. Balance Sheet Effect: The accounting equation is Assets = Liabilities + Stockholders'
Equity.
○ Assets: The issuance of stock brings cash into the firm. Therefore, the Cash
account (an Asset) increases by $50,000.
○ Liabilities: There is no obligation to repay this amount (unlike a loan), so Liabilities
remain unchanged.
○ Stockholders' Equity: The ownership interest in the company increases. The
Common Stock account increases by $50,000.
○ Check: +50,000 \text{ (Assets)} = 0 \text{ (Liabilities)} + 50,000 \text{ (Equity)}. The
equation balances.
2. Income Statement Effect:
○ Revenue/Expense: Issuing stock is a financing transaction, not an operating
transaction. It does not represent earned revenue from goods or services, nor is it
