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CMA Exam Review - Part 1 - Assessment Review
Question 1
1.B.1.i
AICPA.08211326BEC.V.A
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: easy
Bloom Code: 1
SWOT analysis includes considerations of what four strategic dimensions?
Your Answer
Synergies, willingness, openness, and targets
Strengths, weaknesses, opportunities, and targets
Synergies, weaknesses, openness, and threats
Correct
Strengths, weaknesses, opportunities, and threats
Rationale
 Synergies, willingness, openness, and targets
This answer is incorrect. Synergies, willingness, openness, and targets are none of the four strategic dimensions of SWOT analysis.
Rationale
 Strengths, weaknesses, opportunities, and targets
This answer is incorrect. Strengths, weaknesses, and opportunities are three of the four strategic dimensions of SWOT analysis. Targets, however, is
not.
Rationale
 Synergies, weaknesses, openness, and threats
This answer is incorrect. Weaknesses and threats are two of the four strategic dimensions of SWOT analysis. Synergies and openness, however, are
not.
Rationale
 Strengths, weaknesses, opportunities, and threats
SWOT analysis is a process of environmental scanning involving an analysis and assessment of the dimensions of strengths, weaknesses,
opportunities, and threats.
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CMA Exam Review - Part 1 - Assessment Review
Question 2
1.B.1.h
aq.gen.strat.009_1802
LOS: 1.B.1.h
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: medium
Bloom Code: 4
In which of the following settings is the threat of decreased profits most likely to be the highest owing to rivalry among existing competitors?
Correct
Rivalry between the top fast-food restaurant chains in a market
Rivalry between the established market leader in discount superstores and small convenience stores
Rivalry between a company known for its innovative, cutting-edge technology and a company that sells cheap, basic technology
Rivalry between leading satellite television companies where customers who sign up get hardware that is compatible only with that service provider
Rationale
 Rivalry between the top fast-food restaurant chains in a market
Fast-food restaurant chains usually have little product or service differentiation, and customers often focus on price in such markets. Plus,
antagonism may run deep between top competitors, and instability often results as firms may be prone to fight and retaliate.
Rationale
 Rivalry between the established market leader in discount superstores and small convenience stores
There is product differentiation between discount superstores and small convenience stores. The threat of decreased profits owing to rivalry
among existing competitors is not highest in this example.
Rationale
 Rivalry between a company known for its innovative, cutting-edge technology and a company that sells cheap, basic technology
There is product differentiation between innovative technology companies and basic technology companies. The threat of decreased profits owing
to rivalry among existing competitors is not highest in this example.
Rationale
 Rivalry between leading satellite television companies where customers who sign up get hardware that is compatible only with that
service provider
There is product differentiation between satellite television companies as hardware is only compatible with the specific service provider. The threat
of decreased profits owing to rivalry among existing competitors is not highest in this example.
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CMA Exam Review - Part 1 - Assessment Review
Question 3
1.B.1.e
tb.gen.strat.002_1805
LOS: 1.B.1.e
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: hard
Bloom Code: 4
Which of the following statements concerning an organization's mission is not correct?
Your Answer
An organization's mission statement can help it make a decision to diversify its product lines.
An organization's mission statement can help it make a decision to add a new product line.
An organization's mission statement can help it make a decision to enter a new market.
Correct
An organization's mission statement can help it make a decision on which supplier to use.
Rationale
 An organization's mission statement can help it make a decision to diversify its product lines.
A mission statement provides a clear statement about how the organization will work toward achieving its vision. As such, it can be helpful in
formulating long-term business objectives such as whether to diversify the business; therefore, this is an incorrect answer.
Rationale
 An organization's mission statement can help it make a decision to add a new product line.
A mission statement provides a clear statement about how the organization will work toward achieving its vision. As such, it can be helpful in
formulating long-term business objectives such as whether to add or eliminate product lines; therefore, this is an incorrect answer.
Rationale
 An organization's mission statement can help it make a decision to enter a new market.
A mission statement provides a clear statement about how the organization will work toward achieving its vision. As such, it can be helpful in
formulating long-term business objectives such as whether to enter new markets; therefore, this is an incorrect answer.
Rationale
 An organization's mission statement can help it make a decision on which supplier to use.
A mission statement provides a clear statement about how the organization will work toward achieving its vision. As such, it can be helpful in
formulating long-term business objectives such as whether to diversify the business, to add or eliminate product lines, or to enter new markets. A
decision concerning which supplier to use is an operational or day-to-day issue, not a long-term business objective; therefore, this is the correct
answer.
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CMA Exam Review - Part 1 - Assessment Review
Question 4
1.B.1.i
1B1-W005
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: easy
Bloom Code: 2
Identify the threat imposed on an incumbent by the entry of new competitors in the market.
Your Answer
Heavy start-up losses and near-cost pricing.
Correct
Increased cost in order to compete against new entrant.
Economies of scale.
Product differentiation.
Rationale
 Heavy start-up losses and near-cost pricing.
This answer is incorrect. New entrants often incur heavy start-up losses and near-cost pricing in order to gain experience. These are not threats to
incumbents but are entry barriers to new entrants that provide cost advantages to incumbents.
Rationale
 Increased cost in order to compete against new entrant.
A new player in a marketplace generally brings with it new capacity and resources. The profitability for an incumbent in the marketplace may be
reduced if its sales prices are bid down or its product costs are increased in order to compete against a new entrant.
Rationale
 Economies of scale.
This answer is incorrect. Economies of scale are defined as a decline in the unit costs as the volume per period increases. These are not threats to
incumbents but are entry barriers to new entrants that provide cost advantages to the incumbents.
Rationale
 Product differentiation.
This answer is incorrect. Product differentiation refers to the brand identification and existing customer loyalties an entrant must overcome. These
are not threats to incumbents but are entry barriers to new entrants that provide cost advantages to the incumbents.
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CMA Exam Review - Part 1 - Assessment Review
Question 5
1.B.6.b
1B5-CQ01
LOS: 1.B.6.b
Lesson Reference: Pro Forma Financial Statements
Difficulty: medium
Bloom Code: 4
Netco's sales budget for the coming year is as follows.
Items 1 and 3 are different models of the same product. Item 2 is a complement to Item 1. Past experience indicates that the sales volume of Item 2
relative to the sales volume of Item 1 is fairly constant. Netco is considering an 10% price increase for the coming year for Item 1, which will cause sales of
Item 1 to decline by 20%, while simultaneously causing sales of Item 3 to increase by 5%. If Netco institutes the price increase for Item 1, total sales
revenue will decrease by:
Your Answer
$750,000.
Correct
$1,050,000.
$1,200,000.
$1,500,000.
Rationale
 $750,000.
This answer is incorrect. This answer does not consider that sales of Item 2 will also decrease by 20% because it is a complement to Item 1.
Rationale
 $1,050,000.
The new revenue for item 1, given a 10% price increase and a 20% volume decrease, would be calculated as follows:
New revenue, item 1 = (1.1)($50 price per unit)(200,000 units)(0.8) = $8,800,000.
Because item 2 is a complement to item 1, it will experience a 20% drop in volume, as well, resulting in a new revenue amount, which is calculated
as follows:
New revenue, item 2 = (0.8)($1,500,000) = $1,200,000
Item 3 will experience a 5% volume increase, which will result in the following revenue:
New revenue, item 3 = (1.05)($9,000,000) = $9,450,000
Total new revenue for items 1, 2 and 3 = $8,800,000 + $1,200,000 + $9,450,000 = $19,450,000
$19,450,000 is $1,050,000 less than the 20,500,000 originally projected.
Rationale
 $1,200,000.
This answer is incorrect. This answer considers the decline in revenue because of Item 1, but does not consider the decline in revenue because of
Item 2 or the increase in revenue because of Item 3.
Rationale
 $1,500,000.
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This answer is incorrect. This answer considers the decline in revenue because of Item 1 and 2, but does not consider the increase in revenue
because of Item 3.
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CMA Exam Review - Part 1 - Assessment Review
Question 6
1.B.6.b
1C1-AT39
LOS: 1.B.6.b
Lesson Reference: Pro Forma Financial Statements
Difficulty: medium
Bloom Code: 4
Based on past experience, a company has developed the following budget formula for estimating its shipping expenses. The company's shipments
average 12 pounds per shipment.
The planned activity and actual activity regarding orders and shipments for the current month are given in the following schedule.
The actual shipping costs for the month amounted to $21,000. The appropriate monthly flexible budget allowance for shipping costs for the purpose of
performance evaluation would be:
Your Answer
$21,000.
Correct
$22,150.
$20,800.
$20,920.
Rationale
 $21,000.
This answer is incorrect. This answer represents actual shipping costs for the month and is not the monthly flexible budget allowance for shipping
costs.
Rationale
 $22,150.
The appropriate monthly flexible budget allowance for shipping costs for the purpose of performance evaluation would be $22,150. The $22,150 is
calculated as: $16,000 in fixed costs + [($0.50 per pound shipped)(12,300 pounds shipped)] = $16,000 + $6,150 = $22,150.
Rationale
 $20,800.
This answer is incorrect. This answer incorrectly calculates the monthly flexible budget allowance for shipping costs by using budgeted pounds
shipped instead of actual pounds shipped.
Rationale
 $20,920.
This answer is incorrect. This answer incorrectly calculates the monthly flexible budget allowance for shipping costs by using actual shipments
multiplied by average pounds, instead of using actual pounds shipped.
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CMA Exam Review - Part 1 - Assessment Review
Question 7
1.B.6.d
tb.pf.fs.046_1809
LOS: 1.B.6.d
Lesson Reference: Pro Forma Financial Statements
Difficulty: hard
Bloom Code: 4
The LCF Company's actual 20x7 balance sheet and pro forma 20x8 balance sheet are below. In addition, 20x8 pro forma net income is projected to be
$1,000, depreciation expense is expected to be $100 in 20x8, no debt will be repaid in 20x8, and no stock will be issued in 20x8. Based on this, what would
be the cash flow from financing activities on LCF's 20x8 pro forma statement of cash flows?
20x7(Actual) 20x8 (Pro Forma)
Cash
$ 500
$ 800
Accounts receivable
2,200
2,400
Inventory
2,800
3,300
Net fixed assets
5,000
5,500
$10,500
$12,000
Total Assets
Accounts payable
$1,200
$1,600
Other accruals
1,600
2,100
Long-term debt
3,000
3,400
Common equity
Total Liabilities & Equity
4,700
4,900
$10,500
$12,000
Your Answer
$1,300 inflow.
$600 outflow.
$600 inflow.
Correct
$400 outflow.
Rationale
 $1,300 inflow.
Incorrect. The pro forma cash flow from operating activities, not financing activities, is a $1,300 inflow.
Rationale
 $600 outflow.
Incorrect. The pro forma cash flow from investing activities, not financing activities, is a $600 outflow.
Rationale
 $600 inflow.
Incorrect. LCF expects to receive $400 from additional debt (debt increasing from $3,000 to $3,400). In addition, common equity is forecasted to
increase by $200. If the $1,000 pro forma net income (an operating activity) is ignored, one would assume the $200 increase is a cash inflow. This
would result in a pro forma net inflow from financing activities of $600. However, the $1,000 pro forma net income must be accounted for since it is
an operating activity.
Rationale
 $400 outflow.
Correct. Cash flow from financing activities consists of cash flows resulting from borrowing and repaying debt, issuing and buying back stock, and
paying dividends to shareholders. LCF expects to receive $400 from additional debt (debt increasing from $3,000 to $3,400). In addition, common
equity is forecasted to increase by $200. Since pro forma net income is $1,000 (and this increases equity), forecasted dividends must be $800.
Combining these two results in a pro forma net outflow from financing activities of $400 ($400 inflow and $800 outflow).
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CMA Exam Review - Part 1 - Assessment Review
Question 8
1.B.6.b
tb.pf.fs.002_1805
LOS: 1.B.6.b
Lesson Reference: Pro Forma Financial Statements
Difficulty: medium
Bloom Code: 3
Orchid Co. had the following partial budgeted income statement. If the budgeted sales price per unit is $120, what is the budgeted income from
operations?
Sales
$1,620,000
Cost of goods sold
$1,188,000
Gross profit
?
Selling and administrative expenses $ 324,000
Income from operations
Interest expense
Income before income taxes
?
$ 180
?
Income tax expense
$ 21,600
Net Income
$ 86,220
Correct
$108,000
$432,000
$107,820
$216,000
Rationale
 $108,000
Budgeted income from operations is calculated using budgeted revenues and all budgeted expenses except for budgeted interest expense and
budgeted income tax expense. In this example that is calculated as budgeted gross profit less budgeted selling and administrative expenses.
Budgeted gross profit is $432,000 ($1,620,000 − $1,188,000) and budgeted selling and administrative expenses is $324,000. This results in budgeted
income from operations of $108,000 ($432,000 − $324,000). Therefore, this is the correct answer.
Rationale
 $432,000
In this example $432,000 is the budgeted gross profit ($1,620,000 − $1,188,000), not budgeted income from operations; therefore, this is an incorrect
answer.
Rationale
 $107,820
In this example $107,820 is the budgeted income before income taxes ($432,000 − $324,000 − $180), not budgeted income from operations;
therefore, this is an incorrect answer.
Rationale
 $216,000
Budgeted income from operations is calculated using budgeted revenues and all budgeted expenses except for budgeted interest expense and
budgeted income tax expense. In this example, $216,000 is not any subtotal or figure; therefore, this is an incorrect answer.
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CMA Exam Review - Part 1 - Assessment Review
Question 9
1.B.1.i
aq.spec.tools.009_0720
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: medium
Bloom Code: 4
Romero Roman, Inc., a leading manufacturer of cars, has two product lines: small family cars and luxury cars. According to the BCG Growth-Share Matrix,
in which quadrant would small family cars likely be classified for Romero Roman?
Correct
Cash Cows
Dogs
Your Answer
Stars
Question Marks
Rationale
 Cash Cows
The Cash Cow quadrant includes those business units or product lines that have high market share in a slow-growing industry. Romero Roman is a
leading manufacturer of cars, and small family cars should have a higher demand than executive cars. Further, the automobile market is a mature
industry with slow growth. Hence, family cars would likely be classified in the Cash Cow quadrant for this company.
Rationale
 Dogs
The Dog quadrant includes those business units or product lines that have a small share of a market in a slow-growing industry. Since Romero
Roman is a leading manufacturer of cars, this indicates that it has a high share of the small family car market.
Rationale
 Stars
The Star quadrant includes those business units or product lines that have a high share of a market in a fast-growing industry. The automobile
industry is a mature industry with slow growth.
Rationale
 Question Marks
The Question Mark quadrant includes those business units or product lines that have a small share of a market in a fast-growing industry. The
automobile industry is a slow-growth industry, and Romero Roman, as a leading manufacturer of cars, would have a large share of this market.
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CMA Exam Review - Part 1 - Assessment Review
Question 10
1.B.1.c
1B1-W009
LOS: 1.B.1.c
Lesson Reference: Strategy and SWOT
Difficulty: medium
Bloom Code: 4
Wishing-Well Inc., a chain of small convenience stores in Atlanta, Georgia, has just opened a store in a rapidly developing suburb to the north of the city.
The marketing manager of Wishing-Well believes that the suburb is a lucrative market, as the area has several expensive homes and offices but does not
have any other convenience stores or supermarkets. Which of the following is likely to neutralize the opportunity offered by the new market?
Wishing-Well is well known for its unique offerings of local produce and organic food.
Your Answer
The suburb has well-regarded public and private schools.
Correct
Abundant retail space is available for low rates in the suburb.
Wishing-Well has a popular rewards program for its regular customers.
Rationale
 Wishing-Well is well known for its unique offerings of local produce and organic food.
This answer is incorrect. A highly differentiated product line will reduce the threat from new entrants.
Rationale
 The suburb has well-regarded public and private schools.
This answer is incorrect. The presence of well-regarded schools in the area will attract more people to the suburb and expand Wishing-Well's
market.
Rationale
 Abundant retail space is available for low rates in the suburb.
Inexpensive and abundant retail space will lower entry barriers for new entrants, posing a threat to Wishing-Well's business.
Rationale
 Wishing-Well has a popular rewards program for its regular customers.
This answer is incorrect. A good rewards program is more likely to persuade customers to be loyal to Wishing-Well and will help it maintain market
share.
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CMA Exam Review - Part 1 - Assessment Review
Question 11
1.B.6.c
1C1-LS03d
LOS: 1.B.6.c
Lesson Reference: Pro Forma Financial Statements
Difficulty: medium
Bloom Code: 3
After taking into account an operation's flexible budget results, a manager is concerned because although the operation was efficient, it was not
effective. Assume a standard static budget of 10,000 units to sell, $300,000 variable costs, and $100,000 in operating income (OI). Which of the following
actual results matches this scenario?
Your Answer
12,000 units sold; $370,000 variable costs; $120,000 OI.
Correct
12,000 units sold; $355,000 variable costs; $90,000 OI.
9,000 units sold; $290,000 variable costs; $90,000 OI.
8,000 units sold; $280,000 variable costs; $120,000 OI.
Rationale
 12,000 units sold; $370,000 variable costs; $120,000 OI.
This answer is incorrect. This answer does not match the manager's concerns that the operation was "efficient, but not effective." This answer
represents operations that are "not efficient, but effective."
Rationale
 12,000 units sold; $355,000 variable costs; $90,000 OI.
An efficient operation would have costs per unit that are lower than the standard cost and an effective operation would exceed the expected
operating income for the same level of sales. The standard budget for variable costs of $30/unit ($300,000/10,000 units) multiplied by the actual
units sold is $360,000, so actual variable costs of $355,000 are efficient. However, the operation was not effective because it did not meet or exceed
the operating income goal of $100,000.
Rationale
 9,000 units sold; $290,000 variable costs; $90,000 OI.
This answer is incorrect. This answer does not match the manager's concerns that the operation was "efficient, but not effective." This answer
represents operations that are "not efficient and not effective."
Rationale
 8,000 units sold; $280,000 variable costs; $120,000 OI.
This answer is incorrect. This answer does not match the manager's concerns that the operation was "efficient, but not effective." This answer
represents operations that are "not efficient, but effective."
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CMA Exam Review - Part 1 - Assessment Review
Question 12
1.B.6.d
tb.pf.fs.015_1805
LOS: 1.B.6.d
Lesson Reference: Pro Forma Financial Statements
Difficulty: medium
Bloom Code: 3
Paradise Inc. has budgeted sales of $2,480,000 in January, $2,320,000 in February, and $2,880,000 in March. All sales are on credit and accounts are
collected 50% in the month of sale and 50% in the month after sale. What amount will Paradise report on its budgeted balance sheet for accounts
receivable at the end of the quarter?
$3,840,000
Correct
$1,440,000
Your Answer
$2,400,000
$1,160,000
Rationale
 $3,840,000
If 50% of all credit sales for the quarter are assumed to be uncollected at the end of March, $1,160,000 from February budgeted credit sales,
$1,240,000 from January budgeted credit sales would be added to the $1,440,000 from March budgeted credit sales for a total of $3,840,000. All the
February and January credit sales will be collected by the end of March; therefore, this is an incorrect answer.
Rationale
 $1,440,000
The accounts receivable balance shown on a balance sheet represents the amount of credit sales that have not yet been collected. As of the end of
the quarter, 50% of March budgeted credit sales ($1,440,000) would be uncollected. All other credit sales for the quarter will be collected; therefore,
this is the correct answer.
Rationale
 $2,400,000
Paradise will receive $2,400,000 in cash collections during February ($1,160,000 from February credit sales and $1,240,000 from January credit
sales); however, the question asks for the ending accounts receivable balance, not February cash collections. Therefore, this is an incorrect answer.
Rationale
 $1,160,000
Paradise will receive $1,160,000 from February credit sales ($2,320,000 × 50%) in February. The question asks for the ending accounts receivable
balance, not cash collections in February from February credit sales; therefore, this is an incorrect answer.
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Question 13
1.B.6.f
tb.pf.fs.049_1809
LOS: 1.B.6.f
Lesson Reference: Pro Forma Financial Statements
Difficulty: hard
Bloom Code: 4
The AJF Company's 20x7 balance sheet is below. Sales in 20x7 were $800,000 and are expected to be $864,000 in 20x8. In addition, net income was
$50,000 in 20x7 and is expected to be $55,000 in 20x8. AJF paid out 40% of its net income in dividends in 20x7 and plans to do that again in 20x8. AJF does
not plan to issue any new equity in 20x8.
Assuming cash, accounts receivable, inventory, net fixed assets, accounts payable, and other accruals remain the same percentage of sales in 20x8 as
20x7, how will AJF's debt change in 20x8?
Actual 20x7
Cash
Accounts receivable
Inventory
Net fixed assets
$ 80,000
96,000
160,000
280,000
Total Assets
$616,000
Accounts payable
$ 64,000
Other accruals
88,000
Long-term debt
100,000
Common equity
Total Liabilities & Equity
364,000
$616,000
Correct
$4,120 will be borrowed in 20x8.
$104,120 will be borrowed in 20x8.
$7,120 will be borrowed in 20x8.
$59,120 will be borrowed in 20x8.
Rationale
 $4,120 will be borrowed in 20x8.
Correct. The pro forma balance sheet provides information on expected assets, liabilities, and equity as of a given date. In 20x7 cash was 10% of
sales ($80,000 ÷ $800,000), accounts receivable was 12% of sales ($96,000 ÷ $800,000), inventory was 20% of sales ($160,000 ÷ $800,000), net fixed
assets were 35% of sales ($280,000 ÷ $800,000), accounts payable were 8% of sales ($64,000 ÷ $800,000), and other accruals were 11% of sales
($88,000 ÷ $800,000). If these percentages continue in 20x8, cash will be $86,400 (10% × $864,000), accounts receivable will be $103,680 (12% ×
$864,000), inventory will be $172,800 (20% × $864,000), net fixed assets will be $302,400 (35% × $864,000), accounts payable will be $69,120 (8% ×
$864,000), and other accruals will be $95,040 (11% × $864,000). This results in total assets of $665,280. After taking pro forma net income and
dividends into consideration, common equity will be $397,000 ($364,000 + $55,000 − $22,000). Before taking long-term debt into consideration,
liabilities plus equity equal $561,160 ($95,040 + $69,120 + $397,000). This means long-term debt needs to be $104,120 in order to make assets equal
to liabilities and equity ($665,280 − $561,160). Since long-term debt is $100,000 at the beginning of 20x8, an additional $4,120 will need to be
borrowed in 20x8.
Rationale
 $104,120 will be borrowed in 20x8.
Incorrect. In 20x7 cash was 10% of sales ($80,000 ÷ $800,000), accounts receivable was 12% of sales ($96,000 ÷ $800,000), inventory was 20% of sales
($160,000 ÷ $800,000), net fixed assets were 35% of sales ($280,000 ÷ $800,000), accounts payable were 8% of sales ($64,000 ÷ $800,000), and other
accruals were 11% of sales ($88,000 ÷ $800,000). If these percentages continue in 20x8, cash will be $86,400 (10% × $864,000), accounts receivable
will be $103,680 (12% × $864,000), inventory will be $172,800 (20% × $864,000), net fixed assets will be $302,400 (35% × $864,000), accounts payable
will be $69,120 (8% × $864,000), and other accruals will be $95,040 (11% × $864,000). This results in total assets of $665,280. After taking pro forma
net income and dividends into consideration, common equity will be $397,000 ($364,000 + $55,000 − $22,000). Before taking long-term debt into
consideration, liabilities plus equity equal $561,160 ($95,040 + $69,120 + $397,000). This means long-term debt needs to be $104,120 in order to
make assets equal to liabilities and equity ($665,280 − $561,160). However, the $100,000 initial balance needs to be accounted for when
determining new borrowings.
Rationale
 $7,120 will be borrowed in 20x8.
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Incorrect. In 20x7 cash was 10% of sales ($80,000 ÷ $800,000), accounts receivable was 12% of sales ($96,000 ÷ $800,000), inventory was 20% of sales
($160,000 ÷ $800,000), net fixed assets were 35% of sales ($280,000 ÷ $800,000), accounts payable were 8% of sales ($64,000 ÷ $800,000), and other
accruals were 11% of sales ($88,000 ÷ $800,000). If these percentages continue in 20x8, cash will be $86,400 (10% × $864,000), accounts receivable
will be $103,680 (12% × $864,000), inventory will be $172,800 (20% × $864,000), net fixed assets will be $302,400 (35% × $864,000), accounts payable
will be $69,120 (8% × $864,000), and other accruals will be $95,040 (11% × $864,000). This results in total assets of $665,280. If net income and
dividends from 20x7 are incorrectly used, common equity will be calculated as $394,000 ($364,000 + $50,000 − $20,000). Before taking long-term
debt into consideration, liabilities plus equity would equal $558,160 ($69,120 + $95,040 + $394,000). This means long-term debt would need to be
$107,120 in order to make assets equal to liabilities and equity ($665,280 − $558,160). Since long-term debt is $100,000 at the beginning of 20x8, an
additional $7,120 would need to be borrowed in 20x8. Since this is calculated using an incorrect formula for pro forma equity, however, this is not
an accurate figure.
Rationale
 $59,120 will be borrowed in 20x8.
Incorrect. In 20x7 cash was 10% of sales ($80,000 ÷ $800,000), accounts receivable was 12% of sales ($96,000 ÷ $800,000), inventory was 20% of sales
($160,000 ÷ $800,000), net fixed assets were 35% of sales ($280,000 ÷ $800,000), accounts payable were 8% of sales ($64,000 ÷ $800,000), and other
accruals were 11% of sales ($88,000 ÷ $800,000). If these percentages continue in 20x8, cash will be $86,400 (10% × $864,000), accounts receivable
will be $103,680 (12% × $864,000), inventory will be $172,800 (20% × $864,000), net fixed assets will be $302,400 (35% × $864,000), accounts payable
will be $69,120 (8% × $864,000), and other accruals will be $95,040 (11% × $864,000). This results in total assets of $665,280. If pro forma net income
is left out, pro forma common equity would be $342,000 ($364,000 − $22,000). Before taking long-term debt into consideration, liabilities plus
equity would equal $506,160 ($69,120 + $95,040 + $342,000). This means long-term debt would need to be $159,120 in order to make assets equal to
liabilities and equity ($665,280 − $506,160). Since long-term debt is $100,000 at the beginning of 20x8, an additional $59,120 would need to be
borrowed in 20x8. However, pro forma 20x8 net income needs to be accounted for when calculating pro forma common equity.
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Question 14
1.B.1.d
1B1-W017
LOS: 1.B.1.d
Lesson Reference: Strategy and SWOT
Difficulty: medium
Bloom Code: 4
Metis Corp., a large software services company, has benefited in the past from having a strong, centralized leadership. The top management makes
decisions and sets goals for the entire organization and tasks mid- and low-level managers with implementing these in Metis's teams. Which of the
following, if true, indicates that a centralized leadership is now more likely to be a weakness than a strength for Metis?
Metis's top management now consists almost entirely of engineers who have worked for Metis for a long time and have a high degree of expertise in
the services the company offers.
Metis recently won its first contract to provide software services to the U.S. government.
Correct
Metis recently changed its business to focus more on product development, and its teams of product developers cherish creative freedom and
autonomy.
Metis's offices are located primarily in countries where organizational hierarchies are respected.
Rationale
 Metis's top management now consists almost entirely of engineers who have worked for Metis for a long time and have a high degree of
expertise in the services the company offers.
This answer is incorrect. When the management of a company has a high level of expertise in its business, there is a greater chance that a
centralized leadership will be effective.
Rationale
 Metis recently won its first contract to provide software services to the U.S. government.
This answer is incorrect. A centralized leadership is beneficial in landing and managing large projects.
Rationale
 Metis recently changed its business to focus more on product development, and its teams of product developers cherish creative
freedom and autonomy.
A centralized leadership is less effective when teams cherish creative freedom and autonomy.
Rationale
 Metis's offices are located primarily in countries where organizational hierarchies are respected.
This answer is incorrect. If Metis's offices are located primarily in countries where organizational hierarchies are respected, then a centralized
leadership will be a strength.
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Question 15
1.B.6.c
tb.pf.fs.034_1809
LOS: 1.B.6.c
Lesson Reference: Pro Forma Financial Statements
Difficulty: hard
Bloom Code: 4
Below is the actual 20x7 income statement and the pro forma 20x8 income statement for the DFR Manufacturing Company. If a strategic goal for DFR is to
improve the efficiency of producing its goods, does the 20x8 pro forma income statement indicate it will achieve this goal?
20x7 (Actual) 20x8(Pro Forma)
Sales
$600,000
$660,000
Cost of sales
360,000
402,600
Gross margin
240,000
257,400
S&A expenses
150,000
162,000
90,000
95,400
8,000
10,000
Earnings before taxes
82,000
85,400
Tax expense
20,500
21,350
Net Income
$61,500
$64,050
Operating income
Interest expense
Correct
No, because cost of sales is expected to increase from 60% of sales in 20x7 to 61% of sales in 20x8.
No, because net income is expected to decrease from 10.3% of sales in 20x7 to 9.7% of sales in 20x8.
Yes, because gross margin is expected to increase from $240,000 in 20x7 to $257,400 in 20x8.
Yes, because sales are expected to increase 10% from 20x7 to 20x8.
Rationale
 No, because cost of sales is expected to increase from 60% of sales in 20x7 to 61% of sales in 20x8.
Correct. Manufacturers typically measure the efficiency of producing goods by cost of sales as a percentage of sales. Decreases in this percentage
indicate greater efficiency as this means it cost less to produce the same sales revenue as in the past. DFR's cost of sales as a percentage of sales in
20x7 is 60% ($360,000 ÷ $600,000) and is forecast to increase to 61% ($402,600 ÷ $660,000) in 20x8. This indicates lower efficiency in producing
goods.
Rationale
 No, because net income is expected to decrease from 10.3% of sales in 20x7 to 9.7% of sales in 20x8.
Incorrect. Net income as a percentage of sales measures overall efficiency, not just the efficiency of producing goods, as it takes all expenses into
consideration.
Rationale
 Yes, because gross margin is expected to increase from $240,000 in 20x7 to $257,400 in 20x8.
Incorrect. Gross margin is related to the efficiency of producing goods since it is defined as sales revenue less cost of sales. However, the raw dollar
amount of gross margin does not take into consideration the sales generated. DFR's gross margin is forecasted to increase in total, but it is
forecasted to decrease as a percentage of sales (40% to 39%). This indicates lower efficiency.
Rationale
 Yes, because sales are expected to increase 10% from 20x7 to 20x8.
Incorrect. Change in sales measures the overall attractiveness of products and services, not the efficiency of producing goods.
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Question 16
1.B.6.d
tb.pf.fs.037_1809
LOS: 1.B.6.d
Lesson Reference: Pro Forma Financial Statements
Difficulty: hard
Bloom Code: 4
The SII Company's 20x7 balance sheet is below. Sales in 20x7 were $500,000 and are expected to be $560,000 in 20x8. In addition, net income is expected
to be $56,000 in 20x8. Assuming cash, accounts receivable, inventory, net fixed assets, accounts payable, and other accruals remain the same percentage
of sales in 20x8 as 20x7 and long-term debt is the same in 20x8 as 20x7, what is the ending balance for common equity on SII's 20x8 pro forma balance
sheet?
Cash
Accounts receivable
Inventory
Net fixed assets
$ 25,000
60,000
100,000
200,000
Total Assets
$385,000
Accounts payable
$ 30,000
Other accruals
40,000
Long-term debt
50,000
Common equity
265,000
Total liabilities & equity $385,000
Correct
$302,800
$296,800
$311,200
$321,000
Rationale
 $302,800
Correct. The pro forma balance sheet provides information on expected assets, liabilities, and equity as of a given date. In 20x7 cash was 5% of sales
($25,000 ÷ $500,000), accounts receivable was 12% of sales ($60,000 ÷ $500,000), inventory was 20% of sales ($100,000 ÷ $500,000), net fixed assets
were 40% of sales ($200,000 ÷ $500,000), accounts payable were 6% of sales ($30,000 ÷ $500,000), and other accruals were 8% of sales ($40,000 ÷
$500,000). If these percentages continue in 20x8, cash will be $28,000 (5% × $560,000), accounts receivable will be $67,200 (12% × $560,000),
inventory will be $112,000 (20% × $560,000), net fixed assets will be $224,000 (40% × $560,000), accounts payable will be $33,600 (6% × $560,000),
and other accruals will be $44,800 (8% × $560,000). This results in total assets of $431,200. With long-term debt of $50,000, total liabilities will be
$128,400. This means common equity needs to be $302,800 in order to make assets equal to liabilities and equity ($431,200 − $128,400).
Rationale
 $296,800
Incorrect. In 20x7 cash was 5% of sales ($25,000 ÷ $500,000), accounts receivable was 12% of sales ($60,000 ÷ $500,000), inventory was 20% of sales
($100,000 ÷ $500,000), net fixed assets were 40% of sales ($200,000 ÷ $500,000), accounts payable were 6% of sales ($30,000 ÷ $500,000), and other
accruals were 8% of sales ($40,000 ÷ $500,000). If these percentages continue in 20x8, cash will be $28,000 (5% × $560,000), accounts receivable will
be $67,200 (12% × $560,000), inventory will be $112,000 (20% × $560,000), net fixed assets will be $224,000 (40% × $560,000), accounts payable will
be $33,600 (6% × $560,000), and other accruals will be $44,800 (8% × $560,000). This results in total assets of $431,200. If long-term debt is also
forecasted as 10% of sales ($50,000/ $500,000), long-term debt will be forecasted as $56,000 (10% × $560,000). With long-term debt of $56,000, total
liabilities would be $134,400. This would mean common equity would have to be $296,800 in order to make assets equal to liabilities and equity
($431,200 − $134,400). However, long-term debt should not be forecasted as a percentage of sales.
Rationale
 $311,200
Incorrect. In 20x7 cash was 5% of sales ($25,000 ÷ $500,000), accounts receivable was 12% of sales ($60,000 ÷ $500,000), inventory was 20% of sales
($100,000 ÷ $500,000), net fixed assets were 40% of sales ($200,000 ÷ $500,000), accounts payable were 6% of sales ($30,000 ÷ $500,000), and other
accruals were 8% of sales ($40,000 ÷ $500,000). If these percentages continue in 20x8, cash will be $28,000 (5% × $560,000), accounts receivable will
be $67,200 (12% × $560,000), inventory will be $112,000 (20% × $560,000), and net fixed assets will be $224,000. This results in total assets of
$431,200. If figures from 20x7 are used for all liabilities in 20x8 (and not just long-term debt), total liabilities would be $120,000. This would mean
common equity would have to be $311,200 in order to make assets equal to liabilities and equity ($431,200 − $120,000). However, accounts payable
and other accruals should be forecasted as a percentage of sales.
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Rationale
 $321,000
Incorrect. If the forecasted net income for 20x8 is added to the common equity at the end of 20x7 then common equity at the end of 20x8 is
$321,000 ($265,000 + $56,000). However, this does not take dividends into account. Also, assets would not equal liabilities and equity (assets =
$431,200 and liabilities and equity = $128,400 + $321,000).
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Question 17
1.B.1.g
tb.gen.strat.010_1805
LOS: 1.B.1.g
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: easy
Bloom Code: 1
A successful strategic plan should have SMART objectives. Which of the following is not an aspect of SMART objectives?
Specific
Measurable
Your Answer
Timely
Correct
Routine
Rationale
 Specific
One aspect of a SMART objective is that the objective be specific. If an objective is not specific then it can be difficult to develop measures for it. This
would make it difficult to measure progress toward achieving the objective; therefore, this is an incorrect answer.
Rationale
 Measurable
One aspect of a SMART objective is that the objective be measurable. If an objective is not measurable then it will not be possible to assess whether
the objective is proceeding as planned or whether the objective has been met; therefore, this is an incorrect answer.
Rationale
 Timely
One aspect of a SMART objective is that the objective be timely. If an objective is not timely then it will not likely be performed in time to help
achieve an organization's goals; therefore, this is an incorrect answer.
Rationale
 Routine
A successful strategic plan should include SMART objectives. One aspect of a SMART objective is that the objective be realistic, not routine. If an
objective is not realistic then the organization is not likely to achieve it, which would mean the organization is unlikely to achieve its goals. A routine
objective is an objective that is performed on a regular (perhaps daily) basis. An objective does not need to be routine to be effective; therefore, this
is the correct answer.
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Question 18
1.B.6.e
aq.pf.fs.005_1802
LOS: 1.B.6.e
Lesson Reference: Pro Forma Financial Statements
Difficulty: easy
Bloom Code: 1
Which of the following expresses the relationship of changes in balance sheet accounts with changes in the cash account?
Correct
∆ Cash = ∆ Debt + ∆ Equity − ∆ Assets
Your Answer
∆ Cash = ∆ Debt − ∆ Equity − ∆ Assets
∆ Cash = ∆ Debt + ∆ Equity + ∆ Assets
∆ Cash = ∆ Debt − ∆ Assets
Rationale
 ∆ Cash = ∆ Debt + ∆ Equity − ∆ Assets
This answer correctly expresses the relationship of changes in balance sheet accounts with changes in the cash account.
Rationale
 ∆ Cash = ∆ Debt − ∆ Equity − ∆ Assets
This answer incorrectly describes how changes in equity accounts affect the cash account.
Rationale
 ∆ Cash = ∆ Debt + ∆ Equity + ∆ Assets
This answer incorrectly describes how changes in asset accounts affect the cash account.
Rationale
 ∆ Cash = ∆ Debt − ∆ Assets
This answer does not consider how changes in equity affect the cash account.
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Question 19
1.B.6.d
aq.pf.fs.008_1802
LOS: 1.B.6.d
Lesson Reference: Pro Forma Financial Statements
Difficulty: hard
Bloom Code: 6
Shovel Makers Company (SMC) has already created a pro forma income statement and pro forma balance sheet and needs to make a pro forma
statement of cash flows. Depreciation for the year was $750,000 and new equipment costing $2,475,000 was purchased. Dividends of $1,500,000 were
paid on the 100,000 shares outstanding. Below are SMC's current balance sheet, pro forma income statement, and pro forma balance sheet:
Current Balance Sheet
Current Assets
Cash
$ 8,000,000
Accounts receivable
6,500,000
Inventory
9,000,000
Long-term Assets
Building and equipment (net) 15,000,000
Land
3,000,000
Total Assets
$41,500,000
Liabilities
Accounts payable
$ 5,000,000
Bank loan (short-term)
5,500,000
Shareholders’ Equity
Common Stock
20,000,000
Retained earnings
Total Liabilities & Equity
11,000,000
$41,500,000
Pro Forma Income Statement
Sales revenue
Cost of goods sold
Gross margin
Selling & admin expense
Operating profit
$15,000,000
8,000,000
$ 7,000,000
4,000,000
$ 3,000,000
Interest expense
500,000
Net income before tax
$ 2,500,000
Income tax
Net income after tax
525,000
$ 1,975,000
Pro Forma Balance Sheet
Current Assets
Cash
$ 6,000,000
Accounts receivable
9,500,000
Inventory
8,000,000
Long-term Assets
Building and equipment (net) 16,725,000
Land
Total Assets
3,250,000
$43,475,000
Liabilities
Accounts payable
Bank loan (short-term)
$ 6,500,000
4,500,000
Shareholders’ Equity
Common Stock
Retained earnings
Total Liabilities & Equity
21,000,000
11,475,000
$43,475,000
Using a pro forma statement of cash flows, calculate the cash from operating, investing, and financing activities.
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Your Answer
$725,000 cash from operating activities; ($2,725,000) cash spent on investing activities; $0 cash spent on financing activities
Correct
$2,225,000 cash from operating activities; ($2,725,000) cash spent on investing activities; ($1,500,000) cash spent on financing activities
$1,475,000 cash from operating activities; ($1,975,000) cash spent on investing activities; ($1,500,000) cash spent on financing activities
$1,225,000 cash from operating activities; ($2,725,000) cash spent on investing activities; ($500,000) cash spent on financing activities
Rationale
 $725,000 cash from operating activities; ($2,725,000) cash spent on investing activities; $0 cash spent on financing activities
This answer incorrectly categorizes dividends paid as an operating activity.
Rationale
 $2,225,000 cash from operating activities; ($2,725,000) cash spent on investing activities; ($1,500,000) cash spent on financing activities
Below is the pro forma statement of cash flows for SMC:
Pro Forma Statement of Cash Flows
Income
Accounts receivable
$ 1,975,000
(3,000,000)
Accounts payable
1,500,000
Inventory
1,000,000
Depreciation
750,000
Cash from Operating Activities $ 2,225,000
Purchase equipment
Purchase land
($2,475,000)
(250,000)
Cash from Investing Activities ($2,725,000)
Bank loan payment
Common stock sales
Dividends payment
($1,000,000)
1,000,000
(1,500,000)
Cash from Financing Activities ($1,500,000)
Change in Cash
($2,000,000)
Rationale
 $1,475,000 cash from operating activities; ($1,975,000) cash spent on investing activities; ($1,500,000) cash spent on financing activities
This answer incorrectly categorizes depreciation as an investing activity.
Rationale
 $1,225,000 cash from operating activities; ($2,725,000) cash spent on investing activities; ($500,000) cash spent on financing activities
This answer incorrectly categorizes the bank loan as an operating activity.
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Question 20
1.B.6.d
tb.pf.fs.045_1809
LOS: 1.B.6.d
Lesson Reference: Pro Forma Financial Statements
Difficulty: hard
Bloom Code: 4
The LCF Company's actual 20x7 balance sheet and pro forma 20x8 balance sheet are below. In addition, 20x8 pro forma net income is projected to be
$1,000, depreciation expense is expected to be $100 in 20x8, no debt will be repaid in 20x8, and no stock will be issued in 20x8. Based on this, what would
be the cash flow from investing activities on LCF's 20x8 pro forma statement of cash flows?
20x7(Actual) 20x8 (Pro Forma)
Cash
$ 500
$ 800
Accounts receivable
2,200
2,400
Inventory
2,800
3,300
Net fixed assets
5,000
5,500
$10,500
$12,000
Total Assets
Accounts payable
$1,200
$1,600
Other accruals
1,600
2,100
Long-term debt
3,000
3,400
Common equity
Total Liabilities & Equity
4,700
4,900
$10,500
$12,000
$1,300 inflow.
Correct
$600 outflow.
$500 outflow.
$400 outflow.
Rationale
 $1,300 inflow.
Incorrect. The pro forma cash flow from operating activities, not investing activities, is a $1,300 inflow.
Rationale
 $600 outflow.
Correct. Cash flow from investing activities consists of cash flows resulting from the purchase and sale of long-term assets. In LCF's case, investing
activities consist of transactions involving net fixed assets. Net fixed assets is expected to increase by $500. This consists of the $100 decrease for
depreciation expense (an operating activity) plus any new purchases (an investing activity). Purchases must be $600 as that is what is needed to
make the net change in net fixed assets a $500 increase.
Rationale
 $500 outflow.
Incorrect. In LCF's case, investing activities consist of transactions involving net fixed assets. Net fixed assets is expected to increase by $500. The
outflow from investing activities is not $500, however, as this does not take the $100 depreciation expense into consideration.
Rationale
 $400 outflow.
Incorrect. The pro forma cash flow from financing activities, not investing activities, is a $400 outflow.
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Question 21
1.B.6.b
pf.fs.tb.054_0120
LOS: 1.B.6.b
Lesson Reference: Pro Forma Financial Statements
Difficulty: medium
Bloom Code: 4
Calculate the pro forma after-tax profit for next year based on the data shown here.
Results for Last Year Projections for Next Year
Sales
$100,000
10% increase
Variable cost
60,000
10% increase
Salaries
15,000
5% increase
Other expenses
5,000
20% increase
Income tax rate
30%
No change
*Source: Retired ICMA CMA Exam Questions.
Your Answer
$15,000
Correct
$15,575
$16,100
$18,200
Rationale
 $15,000
This answer is incorrect. The sales, variable cost, and other expenses are not projected to increase by 5% and projected income taxes are not
expected to remain the same as last year (the rate is expected to stay the same, not the amount paid).
Rationale
 $15,575
A 10% increase in sales results in pro forma sales of $110,000 for next year, a 10% increase in variable cost results in pro forma variable costs of
$66,000, a 5% increase in salaries results in pro forma salaries of $15,750, and a 20% increase in other expenses results in pro forma other expenses
of $6,000. Combining these results in pro forma taxable income of $22,250 ($110,000 − $66,000 − $15,750 − $6,000). At a tax rate of 30%, pro forma
income taxes are $6,675. This results in pro forma after-tax profit of $15,575 ($22,250 − $6,675).
Rationale
 $16,100
This answer is incorrect. The projected 5% increase in salaries expense must be accounted for when determining pro forma after-tax profit.
Rationale
 $18,200
This answer is incorrect. The projected increases in variable costs and other expenses are not 5%.
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Question 22
1.B.6.a
tb.pf.fs.023_1809
LOS: 1.B.6.a
Lesson Reference: Pro Forma Financial Statements
Difficulty: medium
Bloom Code: 4
The CFO of DE Incorporated wants to evaluate whether accounts receivable as a percentage of total assets is expected to increase over the previous year.
What report or statement should be used for this purpose?
Your Answer
The pro forma income statement.
Correct
The pro forma balance sheet.
The pro forma statement of cash flows.
The capital expenditure budget.
Rationale
 The pro forma income statement.
Incorrect. The pro forma income statement deals with the expected revenues and expenses, not the expected asset balances.
Rationale
 The pro forma balance sheet.
Correct. The pro forma balance sheet provides information on expected assets, liabilities, and equity. As a result, it can be used to evaluate whether
accounts receivable as a percentage of total assets is expected to increase.
Rationale
 The pro forma statement of cash flows.
Incorrect. The pro forma statement of cash flows deals with the expected uses of cash during the year, not specific asset or liability balances.
Rationale
 The capital expenditure budget.
Incorrect. The capital budget deals with capital projects and does not include operating accounts such as accounts receivable.
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Question 23
1.B.1.i
tb.spec.tools.007_1805
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: medium
Bloom Code: 4
Which of the following statements is true concerning PEST analysis as it is used in strategic planning?
Correct
PEST analysis involves assessing an organization's political and regulatory environment, economic environment, social and cultural environment,
and its technological environment.
Your Answer
PEST analysis involves assessing an organization's political and regulatory environment, economic environment, social and cultural environment,
and its training environment.
PEST analysis involves assessing an organization's production environment, economic environment, social and cultural environment, and its
technological environment.
PEST analysis involves assessing an organization's political and regulatory environment, economic environment, supplier environment, and its
technological environment.
Rationale
 PEST analysis involves assessing an organization's political and regulatory environment, economic environment, social and cultural
environment, and its technological environment.
PEST analysis is used to help assess opportunities and threats in an organization's environment as part of the strategic planning process. It involves
assessing an organization's political and regulatory environment, economic environment, social and cultural environment, and its technological
environment. The political and regulatory environment considers the impact of government regulatory action on the organization, the economic
environment considers the impact of macroeconomic factors such as inflation and interest rates on the organization, the social and cultural
environment considers social trends such as demographics on the organization, and technological analysis considers the impact of changes in
technology on the organization. Therefore, this is the correct answer.
Rationale
 PEST analysis involves assessing an organization's political and regulatory environment, economic environment, social and cultural
environment, and its training environment.
PEST analysis does not involve assessing an organization's training environment as a separate component; therefore, this is an incorrect answer.
Rationale
 PEST analysis involves assessing an organization's production environment, economic environment, social and cultural environment,
and its technological environment.
PEST analysis does not involve assessing an organization's production environment as a separate component; therefore, this is an incorrect
answer.
Rationale
 PEST analysis involves assessing an organization's political and regulatory environment, economic environment, supplier environment,
and its technological environment.
PEST analysis does not involve assessing an organization's supplier environment as a separate component; therefore, this is an incorrect answer.
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Question 24
1.B.1.a
tb.swot.004_1805
LOS: 1.B.1.a
Lesson Reference: Strategy and SWOT
Difficulty: easy
Bloom Code: 1
Which of the following is not a level at which companies develop strategies?
Your Answer
Functional
Correct
Mission
Corporate
Competitive
Rationale
 Functional
Strategies at the functional level involve plans and objectives within a business. For example, functional-level strategies can be established for
areas such as marketing, operations, and R&D. This is an incorrect answer.
Rationale
 Mission
Companies develop strategies at multiple levels. They can be developed at the corporate, competitive, and functional levels. Strategies are not set
at the “mission” level because there is no such thing as the “mission” level; therefore, this is the correct answer.
Rationale
 Corporate
Strategies at the corporate level involve plans and objectives for multiple business units within the company. For example, corporate-level
strategies focus on allocating resources among a company's business units. This is an incorrect answer.
Rationale
 Competitive
Strategies at the competitive level involve plans and objectives for an individual business unit. For example, competitive-level strategies focus on
how an individual business unit creates value in its industry. This is an incorrect answer.
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Question 25
1.B.1.d
tb.swot.017_1805
LOS: 1.B.1.d
Lesson Reference: Strategy and SWOT
Difficulty: medium
Bloom Code: 4
Which of the following is an internal factor that should be analyzed during the strategic planning process?
A greater number of political leaders calling for an increase in tariffs on imported goods
Your Answer
The availability of high-speed wireless access on customers’ ability to access your product
A major competitor going out of business
Correct
The ability of a tax return company to prepare returns that are error-free and on-time
Rationale
 A greater number of political leaders calling for an increase in tariffs on imported goods
While a greater number of political leaders calling for an increase in tariffs on imported goods likely impacts the company's ability to achieve its
goals and objectives, this is an external factor, not an internal factor; therefore, this is an incorrect answer.
Rationale
 The availability of high-speed wireless access on customers’ ability to access your product
While the availability of high-speed wireless access on customers’ ability to access your product likely impacts the company's ability to achieve its
goals and objectives, this is an external factor, not an internal factor; therefore, this is an incorrect answer.
Rationale
 A major competitor going out of business
While a major competitor going out of business likely impacts the company's ability to achieve its goals and objectives, this is an external factor,
not an internal factor; therefore, this is an incorrect answer.
Rationale
 The ability of a tax return company to prepare returns that are error-free and on-time
An organization needs to analyze internal factors that could have an impact on its ability to achieve its goals and objectives as part of the strategic
planning process. These internal factors help ensure the organization has the resources, skills, and processes in place to achieve its goals and
objectives. Internal factors can be strengths or weaknesses of the organization. The ability of a tax return company to prepare returns that are
error-free and on-time represents an internal factor that should be analyzed during the strategic planning process; therefore, this is the correct
answer.
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Question 26
1.B.1.i
1B1-W024
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: medium
Umbra Inc., a business unit of ANB Inc., manufactures widgets. On its BCG Growth-Share Matrix, ANB has identified Umbra as a cash cow. The market for
Umbra recently has started growing rapidly, converting it into a high-growth market. Given the changed market conditions, in which of the following
situations will Umbra eventually turn into a question mark on the BCG Growth-Share Matrix?
Your Answer
If Umbra operates in a market with high entry barriers
Correct
If Umbra is not able to expand its production capacity
If Umbra invests its excess cash in meeting additional demand
If ANB decides to sell off all business units identified as dogs
Rationale
 If Umbra operates in a market with high entry barriers
This answer is incorrect. If Umbra operates in a market with high entry barriers, new entrants will find it difficult to enter the market, and the
incumbent (Umbra) will find it easier to retain market share.
Rationale
 If Umbra is not able to expand its production capacity
If Umbra is not able to expand its production capacity, it will be unable to capitalize on the opportunity offered by an expanding market. Its market
share in the high-growth market will eventually dwindle, and it will turn into a question mark on ANB's growth-share matrix.
Rationale
 If Umbra invests its excess cash in meeting additional demand
This answer is incorrect. If Umbra invests its excess cash in meeting additional demand, it increases the likelihood that Umbra will be successful at
maintaining its dominant market share.
Rationale
 If ANB decides to sell off all business units identified as dogs
This answer is incorrect. This is irrelevant. If anything, selling off dogs will free up funds that can be invested in growing Umbra's business.
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Question 27
1.B.1.i
tb.spec.tools.008_1805
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: medium
Bloom Code: 4
Which of the following statements is not correct concerning scenario planning (also called scenario thinking or scenario analysis) as it is used in strategic
planning?
Scenario planning can be used to model the expected impact of plausible alternative trends on an organization.
Scenario planning can be used to help an organization develop a flexible strategic plan.
Your Answer
Scenario planning can be used to help discover ways to deal with opportunities and threats in its external environment.
Correct
Scenario planning can be used to help discover ways to deal with strengths and weaknesses in its internal environment.
Rationale
 Scenario planning can be used to model the expected impact of plausible alternative trends on an organization.
Organizations can use scenario planning to attempt to simulate the impact of alterative trends (such as social, technical, economic, environmental,
educational, political, and aesthetic) on its performance; therefore, this is an incorrect answer.
Rationale
 Scenario planning can be used to help an organization develop a flexible strategic plan.
Organizations can use scenario planning to aid in building a flexible strategic plan; therefore, this is an incorrect answer.
Rationale
 Scenario planning can be used to help discover ways to deal with opportunities and threats in its external environment.
Scenario planning is often used as part of an organization's strategic planning process. Organizations can use scenario planning to help the
organization identify opportunities and threats; therefore, this is an incorrect answer.
Rationale
 Scenario planning can be used to help discover ways to deal with strengths and weaknesses in its internal environment.
Scenario planning is often used as part of an organization's strategic planning process. Organizations use this technique to attempt to simulate the
impact of alterative trends (such as social, technical, economic, environmental, educational, political, and aesthetic) on its performance. This can
help the organization identify opportunities and threats as well as aid in building in flexibility to address these trends. It is not well-suited for
addressing internal environmental factors like organizational strengths and weaknesses; therefore, this is the correct answer.
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Question 28
1.B.6.d
tb.pf.fs.012_1805
LOS: 1.B.6.d
Lesson Reference: Pro Forma Financial Statements
Difficulty: medium
Bloom Code: 3
Bee Colonies produces organic honey, which it sells to health food stores. The company's cash payments budget for 20x5 indicates that all of Bee's direct
materials are purchased on account. Bee's payment history indicates that it pays for 70% of its purchases in the quarter of the purchase and 30% in the
following quarter. Purchases for the fourth quarter of 20x5 were $50,000. Determine the balance of accounts payable on Bee's budgeted balance sheet at
December 31, 20x5.
$35,000
Your Answer
$50,000
Correct
$15,000
$25,000
Rationale
 $35,000
The accounts payable balance shown on a balance sheet represents the amount of credit purchases that have not yet been paid. As of December
31, $35,000 ($50,000 × 70%) of the credit purchases are expected to be paid, not unpaid; therefore, this is an incorrect answer.
Rationale
 $50,000
The $50,000 represents the total increases in accounts payable during the 4th quarter, not the balance at the end of the 4th quarter; therefore, this
is an incorrect answer.
Rationale
 $15,000
The accounts payable balance shown on a balance sheet represents the amount of credit purchases that have not yet been paid. As of December
31, 30% of 4th quarter budgeted credit purchases are expected to be unpaid. This translates to an accounts payable balance of $15,000 ($50,000 ×
30%). Therefore, this is the correct answer.
Rationale
 $25,000
The balance would be $25,000 as of December 31 if 50% of the credit purchases are paid in the quarter following purchase, not 30%; therefore, this
is an incorrect answer.
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Question 29
1.B.6.e
tb.pf.fs.047_1809
LOS: 1.B.6.e
Lesson Reference: Pro Forma Financial Statements
Difficulty: easy
Bloom Code: 4
Which of the following factors is least likely to impact the cash needs of a company?
Collection patterns for accounts receivable.
Your Answer
Payment patterns for accounts payable and other accruals.
Capital expenditure plans.
Correct
Write-offs for obsolete inventory.
Rationale
 Collection patterns for accounts receivable.
Incorrect. Since collection patterns for accounts receivable impact the timing and amount of cash receipts, they are likely to impact the cash needs
of a company.
Rationale
 Payment patterns for accounts payable and other accruals.
Incorrect. Since payment patterns for accounts payable and other accruals impact the timing and amount of cash disbursements, they are likely to
impact the cash needs of a company.
Rationale
 Capital expenditure plans.
Incorrect. Since capital expenditure plans impact the timing and amount of cash disbursements and cash receipts, they are likely to impact the
cash needs of a company.
Rationale
 Write-offs for obsolete inventory.
Correct. Cash needs are based on expected cash disbursements and expected cash receipts. Since write-offs for obsolete inventory are non-cash
losses, they do not impact the cash needs of a company.
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Question 30
1.B.1.e
tb.gen.strat.004_1805
LOS: 1.B.1.e
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: hard
Bloom Code: 4
Which of the following statements concerning an automobile dealership's mission is correct?
Correct
It can help it make a decision whether to stop selling new cars and only sell used cars.
It can help it make a decision whether to offer free snacks to people test-driving a car.
Your Answer
It can help it make a decision whether to hire an additional salesperson.
It can help it make a decision whether to send its sales staff to a 2-hour seminar on selling more effectively.
Rationale
 It can help it make a decision whether to stop selling new cars and only sell used cars.
A mission statement provides a clear statement about how the organization will work toward achieving its vision. As such, it can be helpful in
formulating long-term business objectives such as whether to diversify the business, to add or eliminate product lines, or to enter new markets.
This decision involves the dealership eliminating a product line; therefore, this is the correct answer.
Rationale
 It can help it make a decision whether to offer free snacks to people test-driving a car.
A mission statement can be helpful in formulating long-term business decisions because it provides a clear statement about how the organization
will work toward achieving its vision. A decision whether to offer free snacks to people test-driving a car is an operational or day-to-day issue, not a
long-term business issue; therefore, this is an incorrect answer.
Rationale
 It can help it make a decision whether to hire an additional salesperson.
A mission statement can be helpful in formulating long-term business decisions as it provides a clear statement about how the organization will
work toward achieving its vision. A decision whether to hire an additional salesperson is an operational or day-to-day issue, not a long-term
business issue; therefore, this is an incorrect answer.
Rationale
 It can help it make a decision whether to send its sales staff to a 2-hour seminar on selling more effectively.
A mission statement can be helpful in formulating long-term business decisions as it provides a clear statement about how the organization will
work toward achieving its vision. A decision whether to send its sales-staff to a 2-hour seminar on selling more effectively is an operational or dayto-day issue, not a long-term business objective; therefore, this is an incorrect answer.
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Question 31
1.B.1.c
aq.swot.006_0720
LOS: 1.B.1.c
Lesson Reference: Strategy and SWOT
Difficulty: easy
Bloom Code: 2
Which of the following is not one of the aspects or features of an organization's environment?
Correct
Companies in the same geographical region that will never be customers or competitors
Suppliers and other stakeholders who may partner with the organization, including local governments and community groups
The world in which the organization operates, which involves economic trends, government and legal mandates, and demographic factors
The organization's internal structure, comprising employees, physical assets, financial resources, intellectual property, etc.
Rationale
 Companies in the same geographical region that will never be customers or competitors
This is not one of the aspects or features of an organization's environment. Geographic proximity is not nearly as important in the organization's
environment as are customers and competitors.
Rationale
 Suppliers and other stakeholders who may partner with the organization, including local governments and community groups
This is one of the aspects or features of an organization's environment.
Rationale
 The world in which the organization operates, which involves economic trends, government and legal mandates, and demographic
factors
This is one of the aspects or features of an organization's environment.
Rationale
 The organization's internal structure, comprising employees, physical assets, financial resources, intellectual property, etc.
This is one of the aspects or features of an organization's environment.
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Question 32
1.B.1.g
tb.gen.strat.009_1805
LOS: 1.B.1.g
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: easy
Bloom Code: 1
A successful strategic plan should have SMART objectives. Which of the following is not an aspect of SMART objectives?
Specific
Your Answer
Measurable
Correct
Accurate
Realistic
Rationale
 Specific
One aspect of a SMART objective is that the objective be specific. If an objective is not specific then it can be difficult to develop measures for it. This
would make it difficult to measure progress toward achieving the objective; therefore, this is an incorrect answer.
Rationale
 Measurable
One aspect of a SMART objective is that the objective be measurable. If an objective is not measurable then it will not be possible to assess whether
the objective is proceeding as planned or whether the objective has been met; therefore, this is an incorrect answer.
Rationale
 Accurate
A successful strategic plan should include SMART objectives. One aspect of a SMART objective is that the objective be achievable, not accurate. If an
objective is not achievable then individuals may lose the motivation to work toward achieving the objective. This would make it difficult to achieve
goals. While the measure of an objective can be accurate, the objective itself cannot be accurate; therefore, this is the correct answer.
Rationale
 Realistic
One aspect of a SMART objective is that the objective be realistic. If an objective is not realistic then the organization is not likely to achieve it. That
would mean the organization is unlikely to achieve its goals; therefore, this is an incorrect answer.
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Question 33
1.B.1.g
tb.gen.strat.012_1805
LOS: 1.B.1.g
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: easy
Bloom Code: 1
A successful strategic plan should have SMART objectives. Which of the following is not an aspect of SMART objectives?
Realistic
Correct
Secondary
Your Answer
Achievable
Timely
Rationale
 Realistic
One aspect of a SMART objective is that the objective be realistic. If an objective is not realistic then the organization is not likely to achieve it. That
would mean the organization is unlikely to achieve its goals; therefore, this is an incorrect answer.
Rationale
 Secondary
A successful strategic plan should include SMART objectives. One aspect of a SMART objective is that the objective be specific, not secondary. A
secondary objective is an objective that has a lower priority than a primary objective. While an organization can have some secondary objectives,
they are not likely to be a part of a strategic plan since secondary objectives are not likely to be related to achieving its vision and mission;
therefore, this is the correct answer.
Rationale
 Achievable
One aspect of a SMART objective is that the objective be achievable. If an objective is not achievable then individuals may lose the motivation to
work toward achieving the objective. This would make it difficult to achieve goals; therefore, this is an incorrect answer.
Rationale
 Timely
A strategic plan is a long-term plan that flows from an organization's vision and mission. One aspect of a SMART objective is that the objective be
timely. If an objective is not timely then it will not likely be performed in time to help achieve an organization's goals; therefore, this is an incorrect
answer.
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Question 34
1.B.6.d
aq.pf.fs.006_1802
LOS: 1.B.6.d
Lesson Reference: Pro Forma Financial Statements
Difficulty: medium
Bloom Code: 4
Stove Suppliers (SS) manufactures and sells kitchen stove and oven combinations. SS has already prepared a pro forma income statement, but would
like to prepare a pro forma balance sheet. The following expectations have been established:
Cash balance at 15% of sales revenue.
Accounts receivable balance at 8% of sales revenue.
Inventory balance at 23% of sales revenue.
Accounts payable balance at 18% of sales revenue.
Existing equipment of $45,000,000 will be depreciated $4,000,000.
A $1,600,000 equipment purchase is planned.
SS owns $2,000,000 in land and will not acquire anymore in the coming year.
SS has $30,000,000 in common stock outstanding and does not plan to issue any new shares in the coming year.
Beginning balance of retained earnings is $20,000,000.
Dividends of $1,850,000 will be paid on the 100,000 shares outstanding.
Currently SS has a bank loan of $10,000,000.
The following is SS's pro forma income statement:
Pro Forma Income Statement
Sales revenue
Cost of goods sold
Gross margin
$90,000,000
65,000,000
$25,000,000
Selling & admin expense 15,500,000
Operating profit
$ 9,500,000
Interest expense
2,000,000
Net income before tax
$ 7,500,000
Income tax
Net income after tax
1,575,000
$ 5,925,000
Using a pro forma balance sheet, calculate the increase or decrease in debt financing needed by SS to support the planned level of assets.
Your Answer
$9,725,000
$15,725,000
$21,650,000
Correct
$5,725,000
Rationale
 $9,725,000
This answer does not consider depreciation.
Rationale
 $15,725,000
This answer does not consider the bank loan that SS already has.
Rationale
 $21,650,000
This answer does not add net income after tax to retained earnings and does not consider the bank loan that SS already has.
Rationale
 $5,725,000
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The following is SS's pro forma balance sheet:
Pro Forma Balance Sheet
Current Assets
Cash
$13,500,000 = 90,000,000 × 15%
Accounts receivable
Inventory
7,200,000 = 90,000,000 × 8%
20,700,000 = 90,000,000 × 23%
Long-term Assets
Building and equipment (net) 42,600,000 = 45,000,000 − 4,000,000 + 1,600,000
Land
Total Assets
2,000,000 Unchanged
$86,000,000
Liabilities
Accounts payable
Bank loan (long-term)
$16,200,000 = 90,000,000 × 18%
15,725,000
= 86,000,000 − 30,000,000 − 24,075,000
− 16,200,000
Shareholders’ Equity
Common Stock
30,000,000 Unchanged
Retained earnings
24,075,000 = 20,000,000 + 5,925,000 − 1,850,000
Total Liabilities & Equity
$86,000,000
$15,725,000 total bank loan needed − $10,000,000 current bank loan = $5,725,000 new loan.
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Question 35
1.B.1.e
MQ2901
LOS: 1.B.1.e
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: medium
Bloom Code: 3
Organizations have a number of strategies in place at any given time (e.g., personnel strategy, operations strategy, and marketing strategy). What is
common to all of these strategies?
Correct
All of these strategies derive from the overall organizational strategy and mission statement.
These strategies are all relevant to specific segments of the overall organization.
Your Answer
These strategies are determined independently by the segment managers.
These individual strategies are all established by organizational department heads.
Rationale
 All of these strategies derive from the overall organizational strategy and mission statement.
All strategies derive from the overall organizational strategy and mission statement.
Rationale
 These strategies are all relevant to specific segments of the overall organization.
This answer is incorrect. These strategies are not relevant to specific segments, but relevant to many segments of the overall organization.
Rationale
 These strategies are determined independently by the segment managers.
This answer is incorrect. Strategies are not determined at the segment level or independently by segment managers.
Rationale
 These individual strategies are all established by organizational department heads.
This answer is incorrect. Strategies are determined at top levels of the organization, not at the department level.
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Question 36
1.B.6.d
tb.pf.fs.014_1805
LOS: 1.B.6.d
Lesson Reference: Pro Forma Financial Statements
Difficulty: medium
Bloom Code: 3
Paradise Inc. has budgeted sales of $2,480,000 in January, $2,320,000 in February, and $2,880,000 in March. All sales are on credit and accounts are
collected 50% in the month of sale and 50% in the month after sale. How much cash will Paradise receive in February?
Correct
$2,400,000
Your Answer
$2,600,000
$2,320,000
$1,160,000
Rationale
 $2,400,000
Paradise will receive cash from two sources in February: from credit sales made in February and from credit sales made in January. It will receive
$1,160,000 from February credit sales ($2,320,000 × 50%) and $1,240,000 from January credit sales ($2,480,000 × 50%). These two add up to
$2,400,000; therefore, this is the correct answer.
Rationale
 $2,600,000
Paradise will receive cash from two sources in February: from credit sales made in February and from credit sales made in January. It will receive
$2,600,000 in March ($1,440,000 from March credit sales and $1,160,000 from February credit sales); however, the question asks about February
cash collections, not March cash collections. Therefore, this is an incorrect answer.
Rationale
 $2,320,000
The total credit sales for February is $2,320,000, not the cash received in February. Therefore, this is an incorrect answer.
Rationale
 $1,160,000
Paradise will receive $1,160,000 from February credit sales ($2,320,000 × 50%) in February. It will also receive cash for January credit sales in
February; therefore, this is an incorrect answer.
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Question 37
1.B.6.d
tb.pf.fs.039_1809
LOS: 1.B.6.d
Lesson Reference: Pro Forma Financial Statements
Difficulty: hard
Bloom Code: 4
The ZDF Company's 20x7 balance sheet is below. Sales in 20x7 were $600,000 and are expected to be $654,000 in 20x8. In addition, net income is
expected to be $50,000 in 20x8. Assuming cash, accounts receivable, inventory, net fixed assets, accounts payable, and other accruals remain the same
percentage of sales in 20x8 as 20x7 and long-term debt is the same in 20x8 as 20x7, what is the ending balance for common equity on ZDF's 20x8 pro
forma balance sheet?
Cash
Accounts receivable
Inventory
Net fixed assets
$ 24,000
60,000
120,000
240,000
Total Assets
$444,000
Accounts payable
$ 42,000
Other accruals
54,000
Long-term debt
40,000
Common equity
308,000
Total liabilities & equity $444,000
Correct
$339,320
$335,720
$347,960
$358,000
Rationale
 $339,320
Correct. The pro forma balance sheet provides information on expected assets, liabilities, and equity as of a given date. In 20x7 cash was 4% of sales
($24,000 ÷ $600,000), accounts receivable was 10% of sales ($60,000 ÷ $600,000), inventory was 20% of sales ($120,000 ÷ $600,000), net fixed assets
were 40% of sales ($240,000 ÷ $600,000), accounts payable were 7% of sales ($42,000 ÷ $600,000), and other accruals were 9% of sales ($54,000 ÷
$600,000). If these percentages continue in 20x8, cash will be $26,160 (4% × $654,000), accounts receivable will be $65,400 (10% × $654,000),
inventory will be $130,800 (20% × $654,000), net fixed assets will be $261,600 (40% × $654,000), accounts payable will be $45,780 (7% × $654,000),
and other accruals will be $58,860 (9% × $654,000). This results in total assets of $483,960. With long-term debt of $40,000, total liabilities will be
$144,640. This means common equity needs to be $339,320 in order to make assets equal to liabilities and equity ($483,960 − $144,640).
Rationale
 $335,720
Incorrect. In 20x7 cash was 4% of sales ($24,000 ÷ $600,000), accounts receivable was 10% of sales ($60,000 ÷ $600,000), inventory was 20% of sales
($120,000 ÷ $600,000), net fixed assets were 40% of sales ($240,000 ÷ $600,000), accounts payable were 7% of sales ($42,000 ÷ $600,000), and other
accruals were 9% of sales ($54,000 ÷ $600,000). If these percentages continue in 20x8, cash will be $26,160 (4% × $654,000), accounts receivable will
be $65,400 (10% × $654,000), inventory will be $130,800 (20% × $654,000), net fixed assets will be $261,600 (40% × $654,000), accounts payable will
be $45,780 (7% × $654,000), and other accruals will be $58,860 (9% × $654,000). This results in total assets of $483,960. If long-term debt is also
forecasted as 6.67% of sales ($40,000 ÷ $600,000), long-term debt will be forecasted as $43,600 (6.67% × $654,000). With long-term debt of $43,600,
total liabilities would be $148,240. This would mean common equity would have to be $335,720 in order to make assets equal to liabilities and
equity ($483,960 − $148,240). However, long-term debt should not be forecasted as a percentage of sales.
Rationale
 $347,960
Incorrect. In 20x7 cash was 4% of sales ($24,000 ÷ $600,000), accounts receivable was 10% of sales ($60,000 ÷ $600,000), inventory was 20% of sales
($120,000 ÷ $600,000), net fixed assets were 40% of sales ($240,000 ÷ $600,000), accounts payable were 7% of sales ($42,000 ÷ $600,000), and other
accruals were 9% of sales ($54,000 ÷ $600,000). If these percentages continue in 20x8, cash will be $26,160 (4% × $654,000), accounts receivable will
be $65,400 (10% × $654,000), inventory will be $130,800 (20% × $654,000), and net fixed assets will be $261,600 (40% × $654,000). This results in total
assets of $483,960. If figures from 20x7 are used for all liabilities in 20x8 (and not just long-term debt), total liabilities would be $136,000. This would
mean common equity would have to be $347,960 in order to make assets equal to liabilities and equity ($483,960 − $136,000). However, accounts
payable and other accruals should be forecasted as a percentage of sales.
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Rationale
 $358,000
Incorrect. If the forecasted net income for 20x8 is added to the common equity at the end of 20x7 then common equity at the end of 20x8 is
$358,000 (308,000 + $50,000). However, this does not take dividends into account. Also, assets would not equal liabilities and equity (assets =
$483,960 and liabilities and equity = $144,640 + $358,000).
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Question 38
1.B.6.c
tb.pf.fs.032_1809
LOS: 1.B.6.c
Lesson Reference: Pro Forma Financial Statements
Difficulty: hard
Bloom Code: 4
Below is the actual 20x7 income statement and the pro forma 20x8 income statement for the HYJ Manufacturing Company. If a strategic goal for HYJ is to
improve overall efficiency, does the 20x8 pro forma income statement indicate it will achieve this goal?
20x7 (Actual) 20x8(ProForma)
Sales
$500,000
$550,000
Cost of sales
340,000
357,500
Gross margin
160,000
192,500
S&A expenses
100,000
108,000
60,000
84,500
8,000
10,000
Earnings before taxes
52,000
74,500
Tax expense
13,000
18,625
Net Income
$39,000
$55,875
Operating income
Interest expense
Your Answer
Yes, because cost of sales is expected to decrease from 68% of sales in 20x7 to 65% of sales in 20x8.
Correct
Yes, because net income is expected to increase from 7.8% of sales in 20x7 to 10.2% of sales in 20x8.
Yes, because operating income is expected to increase from 12.0% of sales in 20x7 to 15.4% of sales in 20x8.
Yes, because sales are expected to increase 10% from 20x7 to 20x8.
Rationale
 Yes, because cost of sales is expected to decrease from 68% of sales in 20x7 to 65% of sales in 20x8.
Incorrect. Cost of sales as a percentage of sales measures the efficiency of producing goods, not overall efficiency, because it only takes cost of
sales into consideration.
Rationale
 Yes, because net income is expected to increase from 7.8% of sales in 20x7 to 10.2% of sales in 20x8.
Correct. Companies typically measure overall efficiency by net income as a percentage of sales. Increases in this percentage indicate greater overall
efficiency as this means more income was generated from the same sales revenue as in the past. HYJ's net income as a percentage of sales in 20x7
is 7.8% ($39,000 ÷ $500,000) and is forecast to increase to 10.2% ($55,875 ÷ $550,000) in 20x8. This indicates greater overall efficiency.
Rationale
 Yes, because operating income is expected to increase from 12.0% of sales in 20x7 to 15.4% of sales in 20x8.
Incorrect. Operating income as a percentage of sales measures operational efficiency, not overall efficiency, because it only takes operating costs
such as cost of sales and S&A into consideration. It does not consider nonoperating expenses such as interest and taxes.
Rationale
 Yes, because sales are expected to increase 10% from 20x7 to 20x8.
Incorrect. Change in sales measures the overall attractiveness of products and services, not overall efficiency.
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Question 39
1.B.1.a
1A1-LS14
LOS: 1.B.1.a
Lesson Reference: Strategy and SWOT
Difficulty: easy
Bloom Code: 1
Which of the following best describes the long-term goals and objectives of an entity?
Sales forecast.
Master budget.
Correct
Strategic plans.
Your Answer
Capital expenditure plan.
Rationale
 Sales forecast.
This answer is incorrect. The sales forecast does not describe the long-term goals and objectives of an entity, but what sales the company believes
it can obtain in the short term.
Rationale
 Master budget.
This answer is incorrect. The master budget does not describe the long-term goals and objectives of an entity, but shows what revenue and costs
must be obtained in the short term to accomplish the strategic plans.
Rationale
 Strategic plans.
The strategic planning process is part of the long-term planning of the firm that focuses on the long-term goals and objectives of a firm. During this
process, the strengths and weaknesses of the firm are addressed and utilized to develop a strategy to improve the firm.
Rationale
 Capital expenditure plan.
This answer is incorrect. The capital expenditure plan does not describe the long-term goals and objectives of an entity, but shows what capital
investments must be made in the short term to accomplish the strategic plans.
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Question 40
1.B.1.i
tb.spec.tools.009_1805
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: easy
Bloom Code: 2
Which of the following statements is not correct concerning competitive analysis (sometimes known as competitor analysis) as it is used in strategic
planning?
Competitive analysis can help an organization understand its actual competition, not who it thinks is its competition.
Your Answer
Competitive analysis can help an organization identify new customers.
Competitive analysis involves getting as complete a picture as possible about competitors.
Correct
An industry leader is not likely to benefit from competitive analysis.
Rationale
 Competitive analysis can help an organization understand its actual competition, not who it thinks is its competition.
Organizations use competitive analysis to understand who its competition really is, not who it thinks is its competition; therefore, this is an
incorrect answer.
Rationale
 Competitive analysis can help an organization identify new customers.
Organizations sometimes identify new customers through this technique as they learn that competitors are not satisfying certain segments of the
market as well as they thought; therefore, this is an incorrect answer.
Rationale
 Competitive analysis involves getting as complete a picture as possible about competitors.
Competitive analysis involves getting a complete understanding of its competitors’ history, product and service offerings, financial condition,
operational strategies, facilities, and personnel. A cursory understanding of its competition is not likely to yield many benefits for an organization;
therefore, this is an incorrect answer.
Rationale
 An industry leader is not likely to benefit from competitive analysis.
Competitive analysis is often used as part of an organization's strategic planning process. This technique involves getting a complete
understanding of its competitors’ history, product and service offerings, financial condition, operational strategies, facilities, and personnel. All
firms can benefit from this type of analysis. For example, an industry leader can use this technique to learn how close its competitors are coming to
matching its products or services; therefore, this is the correct answer.
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Question 41
1.B.1.i
tb.spec.tools.012_1805
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: easy
Bloom Code: 1
Which of the following statements concerning a “star” on the Boston Consulting Group (BCG) Growth Share Matrix is correct?
Your Answer
A “star” is a product or service with a high cash generating capability and a low growth rate.
Correct
A “star” is a product or service with a high cash generating capability and a high growth rate.
A “star” is a product or service with a low cash generating capability and a high growth rate.
A “star” is a product or service with a low cash generating capability and a low growth rate.
Rationale
 A “star” is a product or service with a high cash generating capability and a low growth rate.
The Boston Consulting Group Growth Share Matrix classifies products and services based on their ability to generate cash (high or low) and their
expected growth rate (high or low). A “cash cow” is a product or service with a high cash generating capability and a low growth rate not a “star”;
therefore, this is an incorrect answer.
Rationale
 A “star” is a product or service with a high cash generating capability and a high growth rate.
The Boston Consulting Group Growth Share Matrix classifies products and services based on their ability to generate cash (high or low) and their
expected growth rate (high or low). A “star” is a product or service that currently generates significant cash and that cash is expected to grow
significantly in the future. As such, a “star” is a product or service with a high cash generating capability and a high growth rate; therefore, this is the
correct answer.
Rationale
 A “star” is a product or service with a low cash generating capability and a high growth rate.
The Boston Consulting Group Growth Share Matrix classifies products and services based on their ability to generate cash (high or low) and their
expected growth rate (high or low). A “question mark” has a low cash generating capability and a high growth rate not a “star”; therefore, this is an
incorrect answer.
Rationale
 A “star” is a product or service with a low cash generating capability and a low growth rate.
The Boston Consulting Group Growth Share Matrix classifies products and services based on their ability to generate cash (high or low) and their
expected growth rate (high or low). A “dog” has a low cash generating capability and a low growth rate not a “star”; therefore, this is an incorrect
answer.
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Question 42
1.B.1.i
1B1-W015
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: easy
Bloom Code: 2
Which of the following best describes the function of SWOT analysis?
Your Answer
It defines how a firm competes and sets forth the general direction an organization plans to follow to achieve its goals.
It is a guiding image of future success and achievement articulated in terms of an organization's contribution to society.
Correct
It provides a framework to identify a variety of elements that will help or hinder an organization's progress in the environment in which it operates.
It identifies all technologies that impact an organization.
Rationale
 It defines how a firm competes and sets forth the general direction an organization plans to follow to achieve its goals.
This answer is incorrect. Strategy defines how a firm competes and sets forth the general direction an organization plans to follow to achieve its
goals, not SWOT analysis.
Rationale
 It is a guiding image of future success and achievement articulated in terms of an organization's contribution to society.
This answer is incorrect. The guiding image of future success and achievement articulated in terms of an organization's contribution to society is a
vision statement, not SWOT analysis.
Rationale
 It provides a framework to identify a variety of elements that will help or hinder an organization's progress in the environment in which
it operates.
SWOT (or S.W.O.T.) is the acronym for strengths, weaknesses, opportunities, and threats. SWOT analysis provides a framework to identify a variety
of elements that will help or hinder an organization's progress in the environment in which it operates.
Rationale
 It identifies all technologies that impact an organization.
This answer is incorrect. A technology assessment identifies all technologies that impact an organization, not SWOT analysis.
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Question 43
1.B.5.t
1B6-AT01
LOS: 1.B.5.t
Lesson Reference: Pro Forma Financial Statements
Difficulty: medium
Bloom Code: 3
Steers Company has just completed its pro forma financial statements for the coming year. Relevant information is summarized below.
Assuming that the increase in working capital was the result of an increase in the Accounts Receivable balance, the increase in Steer's cash account for
the coming year will be:
Your Answer
$160,000.
$25,000.
$90,000.
Correct
$40,000.
Rationale
 $160,000.
This answer is incorrect. This answer was calculated by adding anticipated capital expenditures and increase in working capital to projected net
income when they should have been subtracted. Additionally, this answer subtracts depreciation expense from net income instead of adding it
back.
Rationale
 $25,000.
This answer is incorrect. This answer does not add depreciation back to net income.
Rationale
 $90,000.
This answer is incorrect. This answer added increase in working capital to net income instead of subtracting it.
Rationale
 $40,000.
The increase in working capital is negative because an asset balance increase from Y1 to Y2 yields a cash balance decrease.
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Question 44
1.B.6.a
aq.pf.fs.003_1802
LOS: 1.B.6.a
Lesson Reference: Pro Forma Financial Statements
Difficulty: medium
Bloom Code: 3
How do the pro forma financial statements link back to the strategic plan?
Pro forma financial statements never link back to the strategic plan. Pro forma financial statements link back to the operational budget as a feedback
evaluation loop.
Your Answer
Pro forma financial statements link back to the strategic plan by determining the strategic plan of the organization for the next year.
Pro forma financial statements never link back to the strategic plan—they are determined by the strategic plan.
Correct
Pro forma financial statements link back to the strategic plan as a feedback evaluation loop.
Rationale
 Pro forma financial statements never link back to the strategic plan. Pro forma financial statements link back to the operational budget
as a feedback evaluation loop.
Pro forma financial statements do link back to the strategic plan. Additionally, pro forma financial statements can either determine the operational
budget or be determined by the operational budget, but do not directly provide feedback to the operational budget.
Rationale
 Pro forma financial statements link back to the strategic plan by determining the strategic plan of the organization for the next year.
Managers determine the strategic plan of the organization. Managers can use information received by comparing pro forma financial statements to
actual results. However, the pro forma statements will not themselves determine the strategic plan of the organization for the next year.
Rationale
 Pro forma financial statements never link back to the strategic plan—they are determined by the strategic plan.
Pro forma financial statements are determined by the strategic plan either directly or indirectly through the operational budget. However, pro
forma financial statements do link back to the strategic plan.
Rationale
 Pro forma financial statements link back to the strategic plan as a feedback evaluation loop.
The comparison of pro forma financial statements with results reported in actual financial statements are a key measure of the success of the
organization's strategic work, which is how the pro forma financial statements link back to the strategic plan—as a feedback evaluation loop.
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Question 45
1.B.1.e
cma11.p1.t1.me.0025_0820
LOS: 1.B.1.e
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: easy
Bloom Code: 1
Which one of the following describes what an organization wants to accomplish and leads to the formulation of long-term business objectives?
*Source: Retired ICMA CMA Exam Questions.
Values
Strategy
Your Answer
Competency
Correct
Mission statement
Rationale
 Values
This answer is incorrect. An organization's values are the organization's principles, beliefs, or philosophy, not what an organization wants to
accomplish and the formulation of long-term objectives.
Rationale
 Strategy
This answer is incorrect. An organization's strategy would include the courses of action the organization will take to achieve its mission or what the
organization want to accomplish and formulation of its long-term business objectives.
Rationale
 Competency
This answer is incorrect. Competency is the ability to successfully achieve goals or objectives or the capability to accomplish a task effectively, not
what an organization wants to accomplish or the formulation of long-term objectives.
Rationale
 Mission statement
An organization's mission statement will include what an organization wants to accomplish and leads to the formulation of long-term business
objectives.
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Question 46
1.B.1.i
1B1-W006
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: medium
Bloom Code: 3
Which of the following situations will most likely enhance a buyer's bargaining leverage?
Correct
Ability to purchase an upstream supplier
Your Answer
Larger supplier compared to the buyer
Buyer's inability to stockpile inventory
Analysis of cost alternatives of smaller identical items
Rationale
 Ability to purchase an upstream supplier
Ability of buyers to backward-integrate will enhance their bargaining leverage. Current prices and/or other terms can make such an alternative
more attractive than continuing to buy externally.
Rationale
 Larger supplier compared to the buyer
This answer is incorrect. A larger supplier can have leverage and an advantage over a small, dispersed customer base. This situation does not
enhance a buyer's bargaining leverage.
Rationale
 Buyer's inability to stockpile inventory
This answer is incorrect. If a buyer cannot stockpile inventory, this does not enhance a buyer's bargaining leverage.
Rationale
 Analysis of cost alternatives of smaller identical items
This answer is incorrect. Analysis of cost alternatives of smaller identical items is an indicator of price sensitivity. This does not provide any
bargaining leverage to buyers.
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Question 47
1.B.6.a
tb.pf.fs.020_1809
LOS: 1.B.6.a
Lesson Reference: Pro Forma Financial Statements
Difficulty: easy
Bloom Code: 4
Which phrase best describes the use of a pro forma balance sheet?
Your Answer
Evaluating whether profitability targets will be met.
Evaluating whether cash flow targets will be met.
Correct
Evaluating whether the debt-to-equity ratio is expected to increase over last year.
Evaluating whether gross profit as a percentage of sales is expected to increase over last year.
Rationale
 Evaluating whether profitability targets will be met.
Incorrect. The pro forma income statement, not the pro forma balance sheet, can be used to evaluate whether profitability targets will be met, as it
provides information on expected revenues, expenses, and income.
Rationale
 Evaluating whether cash flow targets will be met.
Incorrect. The pro forma statement of cash flows, not the pro forma balance sheet, can be used to evaluate whether cash flow targets will be met,
as it classifies all expected cash inflows and outflows from operating, investing, and financing activities for a given period of time.
Rationale
 Evaluating whether the debt-to-equity ratio is expected to increase over last year.
Correct. The pro forma balance sheet provides information on expected assets, liabilities, and equity. This information can be used to calculate
expected values for ratios such as debt-to-equity to see if they will increase over last year.
Rationale
 Evaluating whether gross profit as a percentage of sales is expected to increase over last year.
Incorrect. The pro forma income statement, not the pro forma balance sheet, can be used to evaluate whether gross profit as a percentage of sales
is expected to increase over last year, as it provides information on expected revenues and expenses.
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Question 48
1.B.6.f
tb.pf.fs.053_1809
LOS: 1.B.6.f
Lesson Reference: Pro Forma Financial Statements
Difficulty: hard
Bloom Code: 4
The BNF Company's 20x7 balance sheet is below. Sales in 20x7 were $800,000 and are expected to be $840,000 in 20x8. In addition, net income was
$72,000 in 20x7 and is expected to be $80,000 in 20x8. BNF paid out 40% of its net income in dividends in 20x7 and plans to do that again in 20x8. BNF
does not plan to issue any new equity in 20x8.
Assuming cash, accounts receivable, inventory, net fixed assets, accounts payable, and other accruals remain the same percentage of sales in 20x8 as
20x7, how will BNF's debt change in 20x8?
Actual 20x7
Cash
Accounts receivable
Inventory
Net fixed assets
$ 64,000
96,000
160,000
320,000
Total Assets
$640,000
Accounts payable
$ 88,000
Other accruals
112,000
Long-term debt
100,000
Common equity
Total Liabilities & Equity
340,000
$640,000
Correct
$26,000 will be repaid in 20x8.
$74,000 will be repaid in 20x8.
$74,000 will be borrowed in 20x8.
$54,000 will be borrowed in 20x8.
Rationale
 $26,000 will be repaid in 20x8.
Correct. The pro forma balance sheet provides information on expected assets, liabilities, and equity as of a given date. In 20x7 cash was 8% of sales
($64,000 ÷ $800,000), accounts receivable was 12% of sales ($96,000 ÷ $800,000), inventory was 20% of sales ($160,000 ÷ $800,000), net fixed assets
were 40% of sales ($320,000 ÷ $800,000), accounts payable were 11% of sales ($88,000 ÷ $800,000), and other accruals were 14% of sales ($112,000 ÷
$800,000). If these percentages continue in 20x8, cash will be $67,200 (8% × $840,000), accounts receivable will be $100,800 (12% × $840,000),
inventory will be $168,000 (20% × $840,000), net fixed assets will be $336,000 (40% × $840,000), accounts payable will be $92,400 (11% × $840,000),
and other accruals will be $117,600 (14% × $840,000). This results in total assets of $672,000. After taking pro forma net income and dividends into
consideration, common equity will be $388,000 ($340,000 + $80,000 − $32,000). Before taking long-term debt into consideration, liabilities plus
equity equal $598,000 ($92,400 + $117,600 + $388,000). This means long-term debt needs to be $74,000 in order to make assets equal to liabilities
and equity ($672,000 − $598,000). Since long-term debt is $100,000 at the beginning of 20x8, $26,000 will be repaid to make the balance $74,000.
Rationale
 $74,000 will be repaid in 20x8.
Incorrect. In 20x7 cash was 8% of sales ($64,000 ÷ $800,000), accounts receivable was 12% of sales ($96,000 ÷ $800,000), inventory was 20% of sales
($160,000 ÷ $800,000), net fixed assets were 40% of sales ($320,000 ÷ $800,000), accounts payable were 11% of sales ($88,000 ÷ $800,000), and other
accruals were 14% of sales ($112,000 ÷ $800,000). If these percentages continue in 20x8, cash will be $67,200 (8% × $840,000), accounts receivable
will be $100,800 (12% × $840,000), inventory will be $168,000 (20% × $840,000), net fixed assets will be $336,000 (40% × $840,000), accounts payable
will be $92,400 (11% × $840,000), and other accruals will be $117,600 (14% × $840,000). This results in total assets of $672,000. After taking pro
forma net income and dividends into consideration, common equity will be $388,000 ($340,000 + $80,000 − $32,000). Before taking long-term debt
into consideration, liabilities plus equity equal $598,000 ($92,400 + $117,600 + $388,000). This means long-term debt needs to be $74,000 in order to
make assets equal to liabilities and equity ($672,000 − $598,000). However, this is the ending balance, not the amount to be repaid.
Rationale
 $74,000 will be borrowed in 20x8.
Incorrect. In 20x7 cash was 8% of sales ($64,000 ÷ $800,000), accounts receivable was 12% of sales ($96,000 ÷ $800,000), inventory was 20% of sales
($160,000 ÷ $800,000), net fixed assets were 40% of sales ($320,000 ÷ $800,000), accounts payable were 11% of sales ($88,000 ÷ $800,000), and other
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accruals were 14% of sales ($112,000 ÷ $800,000). If these percentages continue in 20x8, cash will be $67,200 (8% × $840,000), accounts receivable
will be $100,800 (12% × $840,000), inventory will be $168,000 (20% × $840,000), net fixed assets will be $336,000 (40% × $840,000), accounts payable
will be $92,400 (11% × $840,000), and other accruals will be $117,600 (14% × $840,000). This results in total assets of $672,000. After taking pro
forma net income and dividends into consideration, common equity will be $388,000 ($340,000 + $80,000 − $32,000). Before taking long-term debt
into consideration, liabilities plus equity equal $598,000 ($92,400 + $117,600 + $388,000). This means long-term debt needs to be $74,000 in order to
make assets equal to liabilities and equity ($672,000 − $598,000). However, this is the ending balance at the end of 20x8, not the amount to be
borrowed in 20x8.
Rationale
 $54,000 will be borrowed in 20x8.
Incorrect. In 20x7 cash was 8% of sales ($64,000 ÷ $800,000), accounts receivable was 12% of sales ($96,000 ÷ $800,000), inventory was 20% of sales
($160,000 ÷ $800,000), net fixed assets were 40% of sales ($320,000 ÷ $800,000), accounts payable were 11% of sales ($88,000 ÷ $800,000), and other
accruals were 14% of sales ($112,000 ÷ $800,000). If these percentages continue in 20x8, cash will be $67,200 (8% × $840,000), accounts receivable
will be $100,800 (12% × $840,000), inventory will be $168,000 (20% × $840,000), net fixed assets will be $336,000 (40% × $840,000), accounts payable
will be $92,400 (11% × $840,000), and other accruals will be $117,600 (14% × $840,000). This results in total assets of $672,000. If pro forma net
income is left out, pro forma common equity would be $308,000 ($340,000 − $32,000). Before taking long-term debt into consideration, liabilities
plus equity would equal $518,000 ($92,400 + $117,600 + $308,000). This means long-term debt would need to be $154,000 in order to make assets
equal to liabilities and equity ($672,000 − $518,000). Since long-term debt is $100,000 at the beginning of 20x8, an additional $54,000 will need to be
borrowed in 20x8. However, pro forma 20x8 net income needs to be accounted for when calculating pro forma common equity.
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Question 49
1.B.6.d
tb.pf.fs.008_1805
LOS: 1.B.6.d
Lesson Reference: Pro Forma Financial Statements
Difficulty: medium
Bloom Code: 3
Aspen Firs had an accounts receivable balance of $21,500 on its December 31, 20X4, balance sheet. Cash receipts for 20X5 show uncollected credit sales
of $25,000 at the end of 20X5. Aspen is also budgeting $1,000,000 of credit sales in 20X5. What was the accounts receivable balance on the December 31,
20X5, budgeted balance sheet?
$46,500
Your Answer
$21,500
Correct
$25,000
$3,500
Rationale
 $46,500
For accounts receivable to be $46,500 on 12/31/X5, the amount not yet collected would have needed to increase by $25,000 during 20X5; however,
the balance itself is $25,000, not the amount it increased by. Therefore, this is an incorrect answer.
Rationale
 $21,500
Accounts receivable is $21,500 as of 12/31X4, not 12/31/X5; therefore, this is an incorrect answer.
Rationale
 $25,000
The accounts receivable balance shown on a balance sheet represents the amount of credit sales that have not yet been collected. It comprises the
beginning balance for the period, the credit sales for the period, and the amount collected on credit sales for the period. If cash receipts show that
$25,000 in credit sales have not yet been collected at the end of 20X5, the accounts receivable balance as of 12/31/X5 is $25,000. Therefore, this is
the correct answer.
Rationale
 $3,500
Accounts receivable increased by $3,500 during 20X5 (it went from $21,500 to $25,000); however, the increase in accounts receivable is not the same
as the ending balance in accounts receivable. Therefore, this is an incorrect answer.
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Question 50
1.B.6.b
tb.pf.fs.030_1809
LOS: 1.B.6.b
Lesson Reference: Pro Forma Financial Statements
Difficulty: hard
Bloom Code: 4
The JPH Company's 20x7 income statement is below. Sales in 20x8 are expected to decrease by 8%. Assuming cost of sales and S&A expenses remain the
same percentage of sales in 20x8 as 20x7, interest expense is the same in 20x8 as 20x7, and tax expense remains the same percentage of earnings before
taxes in 20x8 as 20x7, what is JPH's pro forma net income for 20x8? Use the percentage-of-sales method to calculate pro forma net income.
Sales
$500,000
Cost of sales
275,000
Gross margin
225,000
S&A expenses
125,000
Operating income
100,000
Interest expense
50,000
Earnings before taxes
50,000
Tax expense
Net Income
12,500
$ 37,500
Correct
$31,500
($2,500)
$34,500
$43,500
Rationale
 $31,500
Correct. The pro forma income statement provides information on expected revenues, expenses, and income for a given period of time. If sales are
expected to decrease by 8%, then 20x8 sales will be $460,000. In 20x7 cost of sales was 55% of sales ($275,000 ÷ $550,000) and S&A expenses were
25% of sales ($125,000 ÷ $500,000). If these percentages continue, cost of sales will be $253,000 (55% × $460,000) and S&A expenses will be $115,000
(25% × $460,000). This results in operating income of $92,000 ($460,000 − $253,000 − $115,000). With interest expense of $50,000, earnings before
taxes will be $42,000. Assuming the 25% tax rate from 20x7 continues ($12,500 ÷ $50,000), income tax expense will be $10,500 (25% × $42,000). This
results in pro forma net income of $31,500 ($42,000 − $10,500).
Rationale
 ($2,500)
Incorrect. If sales are expected to decrease by 8%, then 20x8 sales will be $460,000. If all expenses are assumed to be the same in 20x8 as 20x7, then
pro-forma net income will be calculated as a loss of $2,500 ($460,000 − $275,000 − $125,000 − $50,000 − $12,500). However, only interest expense
remains the same on a dollar basis in 20x8.
Rationale
 $34,500
Incorrect. If sales are expected to decrease by 8%, then 20x8 sales will be $460,000. If net income is also assumed to decrease by 8%, it will be
$34,500 ($37,500 × 0.92). However, this assumes all expenses vary with sales, which is not true for interest expense and tax expense.
Rationale
 $43,500
Incorrect. If sales are expected to decrease by 8%, then 20x8 sales will be $460,000. In 20x7 cost of sales was 55% of sales ($275,000 ÷ $500,000), S&A
expenses were 25% of sales ($125,000 ÷ $500,000), and income tax expense was 25% of earnings before taxes ($12,500 ÷ $50,000). If sales are
incorrectly expected to increase by 8%, they will be $540,000 in 20x8. If this is the case, using the expense percentages above 20x8 pro-forma net
income will be $43,500 ($540,000 − $297,000 − $135,000 − $50,000 − $14,500). However, sales are expected to decrease, not increase.
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Question 51
1.B.6.d
1B6-AT02
LOS: 1.B.6.d
Lesson Reference: Pro Forma Financial Statements
Difficulty: easy
Bloom Code: 2
The cash budget must be prepared before you can complete the:
Correct
forecasted balance sheet.
forecasted income statement.
production budget.
Your Answer
capital expenditure budget.
Rationale
 forecasted balance sheet.
The cash budget determines the projected borrowings, repayments, investments, interest received and interest paid. All of this information is
needed to forecast the balance sheet.
Rationale
 forecasted income statement.
This answer is incorrect. The cash budget does not have to be prepared before completing the forecasted income statement.
Rationale
 production budget.
This answer is incorrect. The cash budget does not have to be prepared before completing the production budget.
Rationale
 capital expenditure budget.
This answer is incorrect. The cash budget does not have to be prepared before completing the capital expenditure budget.
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Question 52
1.B.1.c
tb.swot.001_1805
LOS: 1.B.1.c
Lesson Reference: Strategy and SWOT
Difficulty: medium
Bloom Code: 4
A country's political environment will likely affect which of the following?
Correct
Long-range planning but not budgeting
Budgeting but not long-range planning
Your Answer
Both budgeting and long-range planning
Neither budgeting, nor long-range planning
Rationale
 Long-range planning but not budgeting
Long-range planning requires a company to consider factors that will likely impact the company over the long term, while budgeting typically
covers periods of one year or less. A country's political environment includes items such as regulatory action and taxes. These items are likely to
impact long-range decisions more than short-run decisions. The political environment will likely affect long-range planning but not budgeting;
therefore, this is the correct answer.
Rationale
 Budgeting but not long-range planning
A country's political environment includes items such as regulatory action and taxes. These items are likely to impact long-range decisions more
than short-run decisions. Therefore, this is an incorrect answer.
Rationale
 Both budgeting and long-range planning
A country's political environment includes items such as regulatory action and taxes. These items are likely to impact long-range decisions more
than short-run decisions. Therefore, this is an incorrect answer.
Rationale
 Neither budgeting, nor long-range planning
A country's political environment includes items such as regulatory action and taxes. These items are likely to impact long-range decisions more
than short-run decisions. The political environment will affect businesses; therefore, this is an incorrect answer.
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Question 53
1.B.1.i
tb.spec.tools.014_1805
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: easy
Bloom Code: 1
Which of the following statements concerning a “question mark” on the Boston Consulting Group (BCG) Growth Share Matrix is correct?
A “question mark” is a product or service with a high cash generating capability and a low growth rate.
Your Answer
A “question mark” is a product or service with a high cash generating capability and a high growth rate.
Correct
A “question mark” is a product or service with a low cash generating capability and a high growth rate.
A “question mark” is a product or service with a low cash generating capability and a low growth rate.
Rationale
 A “question mark” is a product or service with a high cash generating capability and a low growth rate.
The Boston Consulting Group Growth Share Matrix classifies products and services based on their ability to generate cash (high or low) and their
expected growth rate (high or low). A “cash cow” is a product or service with a high cash generating capability and a low growth rate not a
“question mark”; therefore, this is an incorrect answer.
Rationale
 A “question mark” is a product or service with a high cash generating capability and a high growth rate.
The Boston Consulting Group Growth Share Matrix classifies products and services based on their ability to generate cash (high or low) and their
expected growth rate (high or low). A “star” is a product or service with a high cash generating capability and a high growth rate not a “question
mark”; therefore, this is an incorrect answer.
Rationale
 A “question mark” is a product or service with a low cash generating capability and a high growth rate.
The Boston Consulting Group Growth Share Matrix classifies products and services based on their ability to generate cash (high or low) and their
expected growth rate (high or low). A “question mark” is a product or service that currently generates relatively little cash but the cash is expected
to grow significantly in the future. As such, a “question mark” is a product or service with a low cash generating capability and a high growth rate.
The future is in question for this product or service. Therefore, this is the correct answer.
Rationale
 A “question mark” is a product or service with a low cash generating capability and a low growth rate.
The Boston Consulting Group Growth Share Matrix classifies products and services based on their ability to generate cash (high or low) and their
expected growth rate (high or low). A “dog” is a product or service with a low cash generating capability and a low growth rate not a “question
mark”; therefore, this is an incorrect answer.
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Question 54
1.B.1.i
aq.spec.tools.002_0720
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: hard
Bloom Code: 5
Infinity Enterprises, a large organization with seven business units, recently prepared a BCG Growth-Share Matrix to evaluate whether it has a balanced
portfolio of businesses. Upon analysis, its three large business units were identified as stars, two medium-size business units were identified as question
marks, and one small business unit each was identified as a cash cow and as a dog. Which of the following is a conclusion you can draw upon evaluating
the data?
Your Answer
The company needs to set up more business units that operate in high-growth markets.
Correct
The company is probably facing a shortage of funds to fuel its growth.
The company should hold onto the business unit identified as a dog in order to maintain a balanced portfolio of businesses.
The company is probably generating excess cash that can be used to start new business units.
Rationale
 The company needs to set up more business units that operate in high-growth markets.
The three large business units identified as stars and two medium-size business units identified as question marks operate in high-growth markets,
which are typically cash drain enterprises. To have a balanced portfolio of businesses, Infinity Enterprises actually needs to strengthen and mature
one or more business units as a large shareholder in a stable growth market.
Rationale
 The company is probably facing a shortage of funds to fuel its growth.
Most of Infinity's business units are either stars or question marks. These operate in high-growth markets and require cash inputs to grow, which
usually are provided by cash cows and sometimes by dogs. Since Infinity has only two small business units in these two quadrants, the company is
likely to be facing a cash crunch.
Rationale
 The company should hold onto the business unit identified as a dog in order to maintain a balanced portfolio of businesses.
The company should work to sell off the business unit identified as a dog. Even though this business is small and not using much cash in a lowgrowth market, it probably represents significant assets and requires management attention that is better focused on the stars or question marks.
Rationale
 The company is probably generating excess cash that can be used to start new business units.
Most of Infinity's business units are either stars or question marks. These operate in high-growth markets and require cash inputs to grow, which
usually are provided by cash cow businesses. Think about what this means for their cash flow.
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Question 55
1.B.1.f
aq.gen.strat.002_0720
LOS: 1.B.1.f
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: medium
Bloom Code: 3
Short-term objectives, tactics for achieving these objectives, and operational planning (master budget) must be congruent with what? Choose the best
answer.
The organization's external environmental factors
Your Answer
The organization's internal environmental factors
The organization's performance evaluation and incentive compensation factors
Correct
The organization's strategic plan and long-term strategic goals
Rationale
 The organization's external environmental factors
While the external environmental factors play a role, short-term objectives, tactics for achieving these objectives, and operational planning (master
budget) depend on more than environmental factors.
Rationale
 The organization's internal environmental factors
While the internal environmental factors play a role, short-term objectives, tactics for achieving these objectives, and operational planning (master
budget) depend on more than environmental factors.
Rationale
 The organization's performance evaluation and incentive compensation factors
Short-term objectives, tactics for achieving these objectives, and operational planning (master budget) are not a result of performance evaluation
and incentive compensation factors. Rather, objective and tactics are used to design performance evaluation and incentive compensation.
Rationale
 The organization's strategic plan and long-term strategic goals
Short-term objectives, tactics for achieving these objectives, and operational planning (master budget) must be congruent with the strategic plan
and contribute to the achievement of long-term strategic goals. The external and internal environmental factors will have an influence on the
strategic plan and long-term strategic goals. Performance evaluation and incentive compensation factors are then based on the the organization's
strategic objectives and tactics.
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Question 56
1.B.1.a
tb.swot.005_1805
LOS: 1.B.1.a
Lesson Reference: Strategy and SWOT
Difficulty: medium
Bloom Code: 2
Which of the following statements concerning strategy levels is correct?
Your Answer
Functional-level strategies address what businesses a company should compete in.
Corporate-level strategies address areas such as marketing, operations, and R&D.
Correct
Competitive-level strategies address how an individual business unit creates value in its industry.
The outcomes should be identical for the various levels of strategy in an organization.
Rationale
 Functional-level strategies address what businesses a company should compete in.
Corporate-level strategies, not functional-level strategies, address what businesses a company should compete in; therefore, this is an incorrect
answer.
Rationale
 Corporate-level strategies address areas such as marketing, operations, and R&D.
Functional-level strategies, not corporate-level strategies, address areas such as marketing, operations, and R&D; therefore, this is an incorrect
answer.
Rationale
 Competitive-level strategies address how an individual business unit creates value in its industry.
Companies develop strategies at multiple levels. They can be developed at the corporate, competitive, and functional levels. Strategies at the
competitive level involve plans and objectives for an individual business unit. For example, competitive-level strategies address how an individual
business unit creates value in its industry. Therefore, this is the correct answer.
Rationale
 The outcomes should be identical for the various levels of strategy in an organization.
While the strategies at different levels need to be aligned with each other, they will have different outcomes, not identical outcomes, since they
involve different aspects of an organization; therefore, this is an incorrect answer.
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Question 57
1.B.1.c
aq.swot.009_0720
LOS: 1.B.1.c
Lesson Reference: Strategy and SWOT
Difficulty: easy
Bloom Code: 1
Which of the following is not an example of an external factor in SWOT analysis?
The economy
Correct
Financial resources
Your Answer
Future technology trends
Competitive forces
Rationale
 The economy
This is an example of an external factor in SWOT analysis.
Rationale
 Financial resources
This is not an example of an external factor in SWOT analysis. It is an internal factor that could be considered as a strength or a weakness for the
organization.
Rationale
 Future technology trends
This is an example of an external factor in SWOT analysis.
Rationale
 Competitive forces
This is an example of an external factor in SWOT analysis.
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Question 58
1.B.1.i
spec.tools.tb.015_0120
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: medium
Bloom Code: 3
After leading the market for the past decade, the growth of product ABC is slowing down. In this stage of its life cycle, the product is still generating
significant amounts of cash flows that cover the company’s investment into new product innovations. According to the BCG Growth-Share Matrix,
product ABC is most likely an example of a:
*Source: Retired ICMA CMA Exam Questions.
star.
Correct
cash cow.
question mark.
dog.
Rationale
 star.
This answer is incorrect. Stars have high relative market share and a high market growth rate.
Rationale
 cash cow.
The BCG Growth-Share Matrix is a tool that can be used to classify a firm’s products or services based on relative market share (high or low) and
market growth rate (high or low). A cash cow is a product with high relative market share and low market growth rate. As a result, it is a product
that generates a significant amount of cash without the need to reinvest in the product. The cash can be used to invest in other products with
higher growth potential. This describes Product ABC.
Rationale
 question mark.
This answer is incorrect. Question marks have low relative market share and a high market growth rate.
Rationale
 dog.
This answer is incorrect. Dogs have low relative market share and a low market growth rate.
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Question 59
1.B.1.g
tb.gen.strat.013_1805
LOS: 1.B.1.g
Lesson Reference: Strategic Objectives and Generic Strategy
Difficulty: easy
Bloom Code: 1
A successful strategic plan should have SMART objectives. Which of the following is not an aspect of SMART objectives?
Correct
Moving
Specific
Achievable
Your Answer
Timely
Rationale
 Moving
A successful strategic plan should include SMART objectives. One aspect of a SMART objective is that the objective be measurable, not moving. If an
objective is not measurable then it will not be possible to assess whether the objective is proceeding as planned or whether the objective has been
met. A moving objective would be an objective that changes regularly. That is not useful because the desired performance would always be
changing (moving); therefore, this is the correct answer.
Rationale
 Specific
One aspect of a SMART objective is that the objective be specific, not secondary. If an objective is not specific then it can be difficult to develop
measures for it. This would make it difficult to measure progress toward achieving the objective; therefore, this is an incorrect answer.
Rationale
 Achievable
One aspect of a SMART objective is that the objective be achievable. If an objective is not achievable then individuals may lose the motivation to
work toward achieving the objective. This would make it difficult to achieve goals; therefore, this is an incorrect answer.
Rationale
 Timely
One aspect of a SMART objective is that the objective be timely. If an objective is not timely then it will not likely be performed in time to help
achieve an organization's goals; therefore, this is an incorrect answer.
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Question 60
1.B.1.i
cma11.p1.t1.me.0020_0820
LOS: 1.B.1.i
Lesson Reference: Specific Strategy Tools
Difficulty: medium
Bloom Code: 3
A company is the leading company in the premium bottled water industry. Its growth is driven mainly by the negative health publicity on carbonated soft
drinks and other sweetened beverages. Extensive inventory and distribution infrastructure is needed to compete in this industry. The company's main
packaging materials can be sourced either locally or easily imported from overseas. With its 60% market share, the company is able to influence prices
and competitive activity. The second biggest competitor holds 20% market share, while the remaining 20% is shared by many small companies.
Supermarkets and other grocery retailers are the largest customer segment, accounting for approximately 45% of sales. The supermarkets and grocery
retailers are driving volume growth and are undergoing consolidation into larger supermarket conglomerates. Using Porter's 5 Forces, which one of the
following statements best reflects the industry environment?
*Source: Retired ICMA CMA Exam Questions.
Low profitability but can increase due to increasing power of buyers
Your Answer
Low profitability due to low threat of substitutes and new entrants
Correct
High profitability but can decrease due to increasing power of buyers
High profitability due to high power of buyers and sellers
Rationale
 Low profitability but can increase due to increasing power of buyers
This answer is incorrect. The increasing power of buyers would result in a decrease of profitability, not an increase in profitability. This is an
example of high profitability but can decrease due to the increasing power of buyers.
Rationale
 Low profitability due to low threat of substitutes and new entrants
This answer is incorrect. A low threat of substitutes and new entrants would increase profitability.
Rationale
 High profitability but can decrease due to increasing power of buyers
This is the correct answer. The higher the bargaining power of buyers, the more they are able to exert pressure on the industry to force prices down.
Rationale
 High profitability due to high power of buyers and sellers
This answer is incorrect. High power of buyers would lead to lower profitability. The higher the bargaining power of buyers, the more they are able
to exert pressure on the industry to force prices down.
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