CMA Fundamentals Financial Accounting

516 Pages·2017·4.63 MB·English

by  Brian Hock

CMA Fundamentals
Volume 2

Financial
Accounting
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Sixth Edition
CMA
Preparatory Program

CMA Fundamentals
Volume 2

Financial
Accounting

Brian Hock, CMA, CIA
and
Lynn Roden, CMA
HOCK international, LLC
P.O. Box 6553
Columbus, Ohio 43206

(866) 807-HOCK or [phone]
[phone]

www.hockinternational.com
[email protected]

Published February 2017

Acknowledgements

Acknowledgement is due to the Institute of Certified Management Accountants for
permission to use questions and problems from past CMA Exams. The questions and
unofficial answers are copyrighted by the Certified Institute of Management Accountants
and have been used here with their permission.

The authors would also like to thank the Institute of Internal Auditors for permission to
use copyrighted questions and problems from the Certified Internal Auditor Examinations
by The Institute of Internal Auditors, Inc., 247 Maitland Avenue, Altamonte Springs,
Florida 32701 USA. Reprinted with permission.

The authors also wish to thank the IT Governance Institute for permission to make use
of concepts from the publication Control Objectives for Information and related
Technology (COBIT) 3rd Edition, © 2000, IT Governance Institute, www.itgi.org.
Reproduction without permission is not permitted.

© 2017 HOCK international, LLC

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Thanks

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 All of the staff of HOCK Training and HOCK international for their patience in the
multiple revisions of the material,
 The students of HOCK Training in all of our classrooms and the students of HOCK
international in our Distance Learning Program who have made suggestions,
comments and recommendations for the material,
 Most importantly, to our families and spouses, for their patience in the long hours
and travel that have gone into these materials.

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consulting.
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CMA Fundamentals, Vol. 2 Table of Contents
Table of Contents

Introduction to the CMA Fundamentals Book ................................................................. 1
Financial Accounting ......................................................................................................... 2
Conceptual Framework 2
The Objective of Financial Reporting 3
Elements of Financial Statements 3
Qualitative Characteristics of Useful Accounting Information 3
Recognition, Measurement, and Disclosure Concepts 5
The Financial Statements 10
The Balance Sheet (Statement of Financial Position) 10
The Income Statement 18
The Statement of Cash Flows (SCF) 24
Statement of Comprehensive Income 26
Statement of Changes in Stockholders’ Equity 28
Limitations of Financial Statements 29
U.S. Accounting Regulations and the FASB .................................................................. 30
History of the Accounting Standard Setting Process 30
The IASB (International Accounting Standards Board) ................................................ 31
Cash and Cash Equivalents ............................................................................................ 33
Cash 33
Cash Equivalents 36
Accounts Receivable ....................................................................................................... 37
Determining the Receivable Amount and Valuing the Receivable 37
Percentage of Sales Method 42
Percentage of Receivables Method 43
Discounts and Initial Recording of the Account Receivable 45
Trade Discounts 45
Cash Discounts (Sales Discounts) 46
Sales Returns 48
Immaterial Amount of Returns 48
Material Amount of Returns 49
Customer Deposits 49
Receivables as an Immediate Source of Cash 51
Factoring of Accounts Receivable 52
Assigning Accounts Receivable 56
Notes Receivable .............................................................................................................. 57
Valuation of Notes Receivable 58
Valuation of Short-Term Notes Receivable 58
Valuation of Long-Term Notes Receivable 58
Calculation of Interest Revenue 60
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Table of Contents CMA Fundamentals, Vol. 2
Calculation of Interest Receivable 61
Amortization of the Premium or Discount 61
Calculating the Gain or Loss on Sale of an Asset Represented by a Note Receivable 63
The Fair Value Option 66
Impairment of Long-Term Notes Receivable 67
Discounting of Notes Receivable 67
Investments in Marketable Securities ............................................................................ 69
Overview of Accounting for Marketable Securities 69
The Fair Value Option 71
Key Issues in Accounting for Marketable Securities 71
Determining the Acquisition Cost 71
Amortizing the Premium or Discount on Debt Securities Held as Investments 71
Subsequent Changes in Market Value of Securities Accounted for at Fair Value 79
Realized Gain or Loss on Sale of Security 84
Transferring Securities between Categories 88
Marketable Securities Summary 89
Financial Instruments and Derivatives ........................................................................... 92
Inventory ........................................................................................................................... 95
Classifications of Inventory 95
Valuing the Inventory When It Is Purchased 96
What Goods Are Included in Inventory 96
What Costs Are Included in Inventory 97
Determining Which Item Is Sold – Cost Flow Assumptions 98
First in First Out (FIFO) 98
Last in First Out (LIFO) 99
Average Cost 101
Effect of the Different Methods 101
The Frequency of Determining Inventory Balances 102
Periodic System 102
Perpetual System 103
The Physical Inventory Count 108
Gross Profit Calculation 108
Errors in Inventory 110
Dollar-Value LIFO 112
The DVLIFO Calculations 113
Recognizing Permanent Declines through the Lower of Cost or Market (LCM) 120
LIFO and LCM 121
Estimating Inventory 123
Gross Profit Method 123
Retail Method 124
Other Inventory Items 138
Property, Plant and Equipment ..................................................................................... 141
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CMA Fundamentals, Vol. 2 Table of Contents
Measurement at Acquisition 141
Internally Constructed Assets 142
Method of Payment at Acquisition 142
Capitalization of Interest on Internally-Constructed Assets 144
Depreciation 150
Calculation of Depreciation 151
Depreciation Methods 151
Depreciation in the Year of Acquisition and the Year of Disposal 155
Subsequent Expenditures 158
Acquisitions and Disposals by Exchange 159
Accounting for Exchanges of Fixed Assets that Have Commercial Substance 160
Accounting for Exchanges of Fixed Assets that Lack Commercial Substance 161
Cash Received in a Nonmonetary Exchange that Lacks Commercial Substance 163
Exchanges of Inventory 165
Summary – Exchanges of Inventory 166
Summary – Nonmonetary Exchanges of Assets 167
Impairment of Long-Lived Assets to be Held and Used 170
Disposals of Long-Lived Assets 172
Long-Lived Assets to be Disposed of by Sale 172
Involuntary Disposals 173
Disposal by Donation 174
Intangible and Other Assets .......................................................................................... 175
Introduction to Intangible Assets 175
Measurement at Acquisition 176
Amortization and Non-Amortization of Various Kinds of Intangibles 176
Specific Intangible Assets and their Accounting Treatments 177
Impairment of Intangible Assets 179
Impairment of Limited-Life Intangible Assets 179
Impairment of Indefinite-Lived Intangible Assets Other Than Goodwill 180
Impairment of Goodwill 180
Presentation of Intangible Assets 182
Research and Development (R&D) 183
Ways in Which Research & Development Costs Are Incurred 183
Accounting Treatment of R&D Expenses 183
Prepaid Expenses 184
Computer Software 185
Current Liabilities ........................................................................................................... 187
Definitely Determinable Liabilities 187
Accounts Payable 187
Short-Term Interest-Bearing Notes Payable 187
Short-Term Zero-Interest-Bearing Notes 188
Current Maturities of Long-Term Debt 189
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Table of Contents CMA Fundamentals, Vol. 2
Dividends Payable 189
Unearned Revenue 189
Customer Advances and Deposits Received 189
Sales Taxes Payable 190
Income Taxes Payable 190
Employee-Related Liabilities 191
Estimated Liabilities 191
Compensated Absences 191
Contingencies and Contingent Liabilities 191
Warranties 193
Premiums and Coupons 195
Refinancing of Short-Term Obligations 197
Non-Current Liabilities ................................................................................................... 198
Bonds 198
Introduction to Bonds 198
Accounting for Bonds 202
Leases 237
Companies that Offer Leasing 238
Advantages of Leasing 238
Accounting for Leases 239
Classification of Leases by the Lessee and the Lessor 240
Leasing Questions 242
Long-Term Notes Payable 243
Notes Payable Issued in the Capital Markets 243
Notes Not Issued at Face Value 244
Mortgage Notes Payable 246
Troubled Debt Restructurings 248
Pensions ......................................................................................................................... 250
Types of Pension Plans 250
Defined Contribution Plans 250
Defined Benefit Plans 251
Accounting for Income Taxes ....................................................................................... 253
Deferred Taxes 253
Presentation of Deferred Tax Assets and Liabilities on the Balance Sheet 262
Permanent Timing Differences 264
Treatment of Net Operating Losses 265
Intra-period Tax Allocation 267
Owners’ Equity ............................................................................................................... 268
Corporate Shareholders’ Equity 268
Common Stock 269
Issuing Common Stock 271
Dividends 272
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