CMA Part 1
Section A. External Financial Reporting Decisions - 15%
Section B. Planning, Budgeting, and Forecasting - 20%
Section C. Performance Management - 20%
Section D. Cost Management -15%
Section E. Internal Controls – 15%
Section F. Technology and Analytics - 15%
Levels A, B, and C
A= Knowledge and Comprehension
B= A+ Application and Analysis
C= A+ B+ Synthesis and Evaluation
CMA Part 2
Section A. Financial Statement Analysis - 20%
Section B. Corporate Finance - 20%
Section C. Decision Analysis - 25%
Section D. Risk Management -10%
Section E. Investment Decisions – 10%
Section F. Professional Ethics - 15%
Levels A, B, and C
A= Knowledge and Comprehension
B= A+ Application and Analysis
C= A+ B+ Synthesis and Evaluation
Section A. External Financial Reporting Decisions
Study Unit 1: External Financial Statements
Study Unit 2: Measurement, Valuation, and Disclosure: Assets -- Short-Term Items
Study Unit 3: Measurement, Valuation, and Disclosure: Assets -- Long-Term Items
Study Unit 4: Measurement, Valuation, and Disclosure: Liabilities
Study Unit 5: Revenue and Impairment Recognition
Study Unit 6: Integrated Reporting
Study Unit 1: External Financial Statements
1.1 Concepts of Financial Accounting
1.2 Statement of Financial Position (Balance Sheet)
1.3 Income Statement and Statement of Comprehensive Income
1.4 Statement of Changes in Equity and Equity Transactions
1.5 Statement of Cash Flows
1.1 Concepts of Financial Accounting
A full set of financial statements includes the following statements:
1) Statement of financial position (Balance sheet)
2) Income statement
3) Statement of comprehensive income
4) Statement of changes in equity
5) Statement of cash flows
1.1 Concepts of Financial Accounting
The Objective of General-Purpose Financial Reporting:
• Report financial information that is useful in making decisions about providing
resources to the reporting entity
• Helps to evaluate liquidity, solvency, financing needs, and the probability of
obtaining financing.
• Understanding the return on economic resources, its variability, and its
components
• Evaluating management
• Predicting future returns
Financial statements must be prepared in conformity with accounting principles
that are generally accepted in the United States (GAAP).
Financial accounting differs from management accounting.
1.1 Concepts of Financial Accounting
Users of Financial Statements:
Users with direct interests
a) Investors or potential investors
b) Suppliers and creditors
c) Employees
d) Management
Users having indirect interests include
a) Financial advisors and analysts
b) Stock markets or exchanges
c) Regulatory authorities
External users & Internal users
1.1 Concepts of Financial Accounting
Features of Financial Statements:
Financial statements are the primary means of communicating financial
information to external parties.
Additional information is provided by notes and disclosures.
The financial statements must be relevant and faithfully represented.
Comparability
Going-concern assumption.
1.1 Concepts of Financial Accounting
Financial statements complement each other. They describe different
aspects of the same transactions, and more than one statement is
necessary to provide information for a specific economic decision.
Accrual Basis of Accounting
Revenues are recognized in the period in which they were earned.
Expenses are recognized in the period in which they were incurred.
1.2 STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)
Overview
The statement of financial position, also called the balance sheet, reports the amounts of
assets (items of value), liabilities (debt), and equity (net worth) and their relationships at
a moment in time, such as at the end of the fiscal year.
It helps users assess liquidity, financial flexibility, the efficiency with which assets are
used, capital structure, and risk.
Basic accounting equation Assets = Liabilities + Equity
Proprietary theory
1.2 STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)
Elements of the Balance Sheet
Assets (Future Economic benefits)
Liabilities (Future outflow of Economic Obligations)
Equity (Residual interest in entity)
1.2 STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)
Elements of the Balance Sheet
Current assets:
Cash
Certain investments
Accounts and notes receivable
Inventories
Prepaid expenses
Noncurrent assets:
Certain investments and funds
Property, plant, and equipment (PPE)
Intangible assets
Other noncurrent assets
1.2 STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)
Elements of the Balance Sheet
Current liabilities:
Accounts payable
Current notes payable
Current maturities of noncurrent liabilities
Noncurrent liabilities:
Noncurrent notes payable
Bonds payable
1.2 STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)
Elements of the Balance Sheet
Equity
Capital Contribution by owners
Par Value & Additional paid in capital
Retained earnings
-Treasury stock
Accumulated other comprehensive income
1.2 STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)
Limitations of the Balance Sheet.
The balance sheet shows a company’s financial position at a single
point in time
Historical Costs
Estimates and management judgment.
The balance sheet omits many items that cannot be recorded
objectively but have financial value to the company.
1.3 INCOME STATEMENT AND STATEMENT OF COMPREHENSIVE INCOME
The income statement reports the results of an entity’s operations over a period of time, such as
a year.
The elements of an income statement:
Revenues- are inflows or other enhancements of assets or settlements of liabilities (or both) from
delivering or producing goods, providing services, or other activities that qualify as ongoing major
or central operations.
Gains- are increases in equity (or net assets) other than from revenues or investments by owners.
Expenses- are outflows or other usage of assets or incurrences of liabilities (or both) from
delivering or producing goods, providing services, or other activities that qualify as ongoing major
or central operations
Losses- are decreases (which may or may not occur) in equity (or net assets) other than from
expenses or distributions to owners.
Income (Loss) = Revenues + Gains – Expenses – Losses
1.3 INCOME STATEMENT AND STATEMENT OF COMPREHENSIVE INCOME
All transactions affecting the net change in equity during the period are included in
income statement except:
1) Transactions with owners
2) Prior-period adjustments (such as error correction or a change in accounting principle)
3) Items reported initially in other comprehensive income
4) Transfers to and from appropriated retained earnings
Income or loss for the period (a nominal account) is closed to retained earnings (a real
account) at the end of the reporting period.
1.3 INCOME STATEMENT AND STATEMENT OF COMPREHENSIVE INCOME
Matching is essentially synonymous with associating cause and
effect.
Under the matching principle, the recognition of expense and
related revenue occurs in the same accounting period.
1.3 INCOME STATEMENT AND STATEMENT OF COMPREHENSIVE INCOME
Cost of Goods Sold
Retailer:
Beginning inventory
(+)Net purchases
(+)Freight-in
Goods available for sale
(-)Ending inventory)
Cost of goods sold
1.3 INCOME STATEMENT AND STATEMENT OF COMPREHENSIVE INCOME
Cost of Goods Sold
Manufacturer:
Beginning direct materials inventory
(+)Purchases during the period
(-)Ending direct materials inventory
Direct materials used in production
(+)Direct labor costs
(+)Manufacturing overhead costs (Fixed + Variable)
Total manufacturing costs
(+)Beginning work-in-process inventory
(-)Ending work-in-process inventory
Cost of goods manufactured
(+)Beginning finished goods inventory
(-)Ending finished goods inventory
Cost of goods sold
1.3 INCOME STATEMENT AND STATEMENT OF COMPREHENSIVE INCOME
General and administrative expenses are incurred for the benefit
of the enterprise as a whole and are not related wholly to a
specific function, e.g., selling or manufacturing
Selling expenses are those incurred in selling or marketing
Shipping costs are also often classified as selling costs
Interest expense is recognized based on the passage of time.
1.3 INCOME STATEMENT AND STATEMENT OF COMPREHENSIVE INCOME
Income Statement Formats
Single-step
Multiple-step
1.3 INCOME STATEMENT AND STATEMENT OF COMPREHENSIVE INCOME
Income Statement Formats
Multiple-step
The most common way to present the income statement is the condensed format of the multiple-step
income statement, which includes only the section totals.
Net sales
(-)Cost of goods sold
Gross profit
(-) Selling expenses
(-)Administrative expenses
Income from operations
(+)Other revenues and gains
(-)Other expenses and losses
Income before taxes
(-)Income taxes
Net income
1.3 INCOME STATEMENT AND STATEMENT OF COMPREHENSIVE INCOME
When an entity reports a discontinued operation, it must be
presented in a separate section between income from continuing
operations and net income.
Gain or loss from operations of the discontinued component
Gain or loss on the disposal of this component
1.3 INCOME STATEMENT AND STATEMENT OF COMPREHENSIVE INCOME
Limitations of the Income Statement
Does not always show all items of income and expense.
The financial statements report accrual-basis results for the period.
The preparation requires estimates and management judgment
1.3 INCOME STATEMENT AND STATEMENT OF COMPREHENSIVE INCOME
Statement of Comprehensive Income
Comprehensive income includes all changes in equity (net assets) of a business during a
period except those from investments by and distributions to owners.
Net income or loss
Other comprehensive income (net of Tax)
The effective portion of a gain or loss on a hedging instrument in a cash flow hedge
Unrealized holding gains and losses due to changes in the fair value of available-for-sale debt securities
Translation gains and losses for financial statements of foreign operations
Certain amounts associated with accounting for defined benefit postretirement plans
Total comprehensive income
1.4 Statement of Changes in Equity and Equity Transactions
Statement of Changes in Equity
A statement of changes in equity presents a reconciliation for the
accounting period of the beginning balance for each component of
equity to the ending balance.
1) Net income (loss)
2) Distributions to owners (dividends paid).
3) Issuance of common stock.
4) Total change in other comprehensive income.
5) Repurchase of common stock (treasury stock)
1.4 Statement of Changes in Equity and Equity Transactions
Statement of Changes in Equity
1.4 Statement of Changes in Equity and Equity Transactions
Statement of Retained Earnings
A statement of retained earnings reconciles the beginning and ending
balances of the account. This statement is reported as part of the statement
of changes in equity in a separate column.
1.4 Statement of Changes in Equity and Equity Transactions
Prior-period Adjustments
Cumulative effect on the income statement of changes in accounting
principle (e.g., change in inventory valuation method)
Corrections of prior-period financial statement errors
Retrospective application.
Changes in accounting estimate prospective application.
Affects future periods only.
1.4 Statement of Changes in Equity and Equity Transactions
Stock
Authorized- Maximum that may be legally issued
Issued- Amount been issued
Outstanding- Shares issued and held by Share holders.
Treasury Stocks
1.4 Statement of Changes in Equity and Equity Transactions
Stock
Common Stock
The owners of the firm
Voting rights
Dividend
liquidating distributions
Preemptive rights
1.4 Statement of Changes in Equity and Equity Transactions
Stock
Preferred Stock
Dividends preference
liquidating distributions preference
Convertible
1.4 Statement of Changes in Equity and Equity Transactions
Equity Transactions – Issuance of Stock
Cash is increased
The appropriate stock account is increased for total par value.
Additional paid-in capital is increased for the difference
Direct costs of issuing stock reduce the net proceeds received and
additional paid-in capital
1.4 Statement of Changes in Equity and Equity Transactions
Equity Transactions – Treasury Stock
At cost
When treasury stock is recorded at cost, treasury stock is debited for the full
cost of the purchase.
At Par Value
Under the par value method, treasury stock is debited for the par value of
the stock.
No voting rights/cash dividends/distributions in liquidation.
1.4 Statement of Changes in Equity and Equity Transactions
Equity Transactions – Treasury Stock
Example:
1. Company X reacquired 5,000 shares of its $1 par-value common stock for $20 per share. This stock had
originally been issued at $17 per share.
2. Company X reacquired 5,000 shares of its $1 par-value common stock for $10 per share.
1.4 Statement of Changes in Equity and Equity Transactions
Equity Transactions – Cash Dividend
Declaration date
Record date
Payment date
1.4 Statement of Changes in Equity and Equity Transactions
Equity Transactions – Property Dividend
The property is remeasured to fair value
The carrying amount of retained earnings is decreased for the fair value of the property to be distributed
The property is distributed as a dividend.
1.4 Statement of Changes in Equity and Equity Transactions
Equity Transactions – Stock Dividend
No distribution of Cash or other property
The accounting depends on the percentage of new shares to be issued
Less than 20% to 25% is stock dividend
Fair value reclassified from retained earnings to common stock (at par value)
and the difference to additional paid-in capital.
More than 20% to 25% stock split in the form of a dividend
The par value of the additional shares issued is reclassified from retained
earnings to common stock
1.4 Statement of Changes in Equity and Equity Transactions
Equity Transactions – Stock Dividend
1.4 Statement of Changes in Equity and Equity Transactions
Stock Split
Do not affect any aggregate par value or Total Equity
Reduces the par value of each stock
Increases the number of shares outstanding.
No entry is made, and no transfer from retained earnings occurs.
1.4 Statement of Changes in Equity and Equity Transactions
Note Disclosures
1) Class of stock (including related rights and privileges)
2) Share-based payment compensation
3) Dividends
4) Retained earnings
5) Stockholders’ equity
1.4 Statement of Changes in Equity and Equity Transactions
Limitations of the Statement of Changes in Equity
The data for retained earnings is not sufficient for assessing the amount
actually available to be reinvested in the company or to pay debt.
Based on a specific time period.
1.5 STATEMENT OF CASH FLOWS
• Cash inflows and outflows
• Operating, investing and financing activities
• Reconciles the beginning and ending balances of cash
1.5 STATEMENT OF CASH FLOWS
Operating activities
Are primarily derived from the principal revenue producing activities of the entity.
Cash Inflows:
Cash receipts from the sale of goods and services
Cash receipts from royalties, fees, commissions, trading debt securities, and other
revenue
Cash received in the form of interest or dividends
Cash outflows:
Cash payments to suppliers for goods and services
Cash payments to employees
Cash payments to government for taxes, duties, fines, and other fees or penalties
Payments of interest on debt
1.5 STATEMENT OF CASH FLOWS
Investing activities
Inflow:
Cash receipts from sale of long-term assets
cash receipts from sale or maturity of debt instruments of other entities for investing
purposes
Cash receipts from repayment of advances and loans made to other parties
Outflow:
Cash payments to acquire long term assets
Cash payments to acquire equity and debt instruments of other entities for investing
purposes.
Cash advances and loans made to other parties
1.5 STATEMENT OF CASH FLOWS
Financing activities
Cash Inflow:
Cash proceeds from issuing shares and other equity instruments
Cash proceeds from issuing loans, notes, bonds, and other short-term or
long-term borrowings
Outflow:
Cash repayments of amounts borrowed.
Payments of cash dividends
Cash payments to acquire or redeem the entity’s own shares
Cash payments by a lessee for a reduction of the outstanding liability
relating to a finance lease.
1.5 STATEMENT OF CASH FLOWS
1.5 STATEMENT OF CASH FLOWS
Cash Flows Note Disclosures
1.5 STATEMENT OF CASH FLOWS
Indirect Method of Presenting Operating Cash Flows
1.5 STATEMENT OF CASH FLOWS
Indirect Method of Presenting Operating Cash Flows
1.5 STATEMENT OF CASH FLOWS
Indirect Method of Presenting Operating Cash Flows
1.5 STATEMENT OF CASH FLOWS
Indirect Method of Presenting Operating Cash Flows
1.5 STATEMENT OF CASH FLOWS
Indirect Method of Presenting Operating Cash Flows
1.5 STATEMENT OF CASH FLOWS
Indirect Method of Presenting Operating Cash Flows
1.5 STATEMENT OF CASH FLOWS
Indirect Method of Presenting Operating Cash Flows
1.5 STATEMENT OF CASH FLOWS
Indirect Method of Presenting Operating Cash Flows
1.5 STATEMENT OF CASH FLOWS
Direct Method of Presenting Operating Cash Flows
1.5 STATEMENT OF CASH FLOWS
Limitations of the Statement of Cash Flows
• A cash flow statement is not sufficient for forecasting the profitability of a
firm as noncash items are not included in the calculation of cash flow from
operating activities.
• A cash flow statement may not represent the true liquid position of an
entity.
• Information can be manipulated in the statement of cash flows
Study Unit 1: External Financial Statements
