download cma hock 2020 part1

download cma hock 2020

download cma hock 2020 part1

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

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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

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