CMA Sample Que

PART 1

BUSINESS ANALYSIS

TABLE OF CONTENTS

Introduction page 2

Sample questions page 3- 21

Answers to sample questions page 22-35

Content specification outline page 36-39

IMA Ethical Standards page 40-42

Attachments:

Time Value of Money Tables page 43-46

Order forms for additional resources page 47-49

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Sample Questions – Part 1

Introduction

The Certified Management Accountant (CMA) is endorsed by the Institute of Management Accountants (IMA). The Institute of Certified Management Accountants (ICMA) is publishing this book of sample questions with answers to help you prepare for the CMA examination. This book is intended to familiarize you with the types of questions that you will encounter on the exams. These questions are actual “retired” questions from the computer-based CMA exam. This publication should be used as a supplement to other study materials. The book includes 50 sample questions, with a proportional representation from each of the sections within this part and at various cognitive levels. Recorded next to each question number is a topic reference to the content specification outline, which is also included in this publication. In addition, we have enclosed time value of money tables that are available to you on the computer when you take the exam. The answers to the questions, along with explanations and supporting calculations, are shown at the end of the question section. Textbook references and the relevant learning outcome statements are also included with the answer. The ICMA publishes a book of sample questions for each of the three multiple-choice parts of the revised CMA programs. We also publish “Resource Guide for Revised CMA Exam,” which includes comprehensive textbook references for all line items on the content specification outline, exam statistics, and exam taking strategies. In addition, those candidates who previously took and failed an exam part can order an Advanced Exam Performance report. This report follows the Examination Content Specification Outlines, which means you will know exactly what topics and subtopics you need to study. The report separately shows areas of study that need improvement based on your exam results, so that you can save time by focusing on your weakest areas and improve your score. The CMA Program is a rigorous test of your skills and capabilities and requires dedication to be successful. We hope that these sample questions will be a valuable resource as your pursue your goal of certification. Should you have questions about the certification process, please let us know or visit our website www.imanet.org. Good luck on the exam!


SAMPLE QUESTIONS – PART 1 1. Topic A.1.a. Which one of the following factors would cause the aggregate supply curve shown below to shift from AS(1) to AS(2)?

PRICE

LEVEL

REAL GDP

AS

(1)AS

(2)

a. An improvement in technology. b. A higher resource price. c. An increase in the expected rate of inflation. d. A decrease in productivity. 28 2. Topic A.1.b. An economic research firm performed extensive studies on the market for large screen televisions (LSTs). Portions of the results are shown below.

Household Income LST Sales (units) $50,000 20,000 60,000 28,000 72,000 39,200

Price of LSTs LST Sales (units) $1,000 100,000 900 115,000 810 132,250

The income elasticity of demand for LSTs is a. 0.4. b. 1.5. c. 2.0. d. 2.5.


Quest Number 7 3. Topic A.1.b. Worldwide, Inc. noticed that they were losing business to others firms. In view of this, the company decided to change its monthly charges for its various telephone services as follows. Previous Rate New Rate Call Waiting $ 8 $ 4 Caller ID 6 4 International Calling 3 1 Internet Access 15 13 In response to these price changes, the demand for the above services changed as follows. Previous Demand New Demand Call Waiting 100 150 Caller ID 50 70 International Calling 30 40 Internet Access 150 160 The price elasticity of demand is the highest for a. Call Waiting. b. Caller ID. c. International Calling. d. Internet Access. tion Number 5 4. Topic A.1.c. A valid reason for the government to intervene in the wholesale electrical power market would include which one of the following? a. A price increase that is more than expected. b. Electricity is an essential resource and the wholesale market is not competitive. c. The electricity distribution companies are losing money. d. Foreign power generators have contracts with the local government at very high prices.


5. Topic A.4.e. Nations that import significant amounts of oil follow the actions of the Organization of Petroleum Exporting Countries (OPEC) very closely. Likewise, OPEC members follow the supply and demand conditions in the nations that are major oil consumers. Which one of the following statements with regard to an organization such as OPEC is correct? a. An announced discovery of significant oil reserves in the North Sea would most likely cause

OPEC to decrease production. b. Individual members of OPEC can increase their income by decreasing production. c. OPEC pricing has very little effect on heating oil prices in the northeastern United States since

this seasonal increase in demand is a domestic issue. d. Importing nations often attempt to convince OPEC to increase output in order to

reduce prices. estion Number 55 6. Topic A.3.b. From the following information calculate economic profit. Total Sales Revenue $600,000 Explicit Costs: Total Cost of Sales 200,000 Selling Expenses 50,000 General & Administrative Expenses 25,000 Implicit Costs: Foregone Interest 20,000 Foregone Entrepreneurial Income 15,000 a. $400,000. b. $325,000. c. $305,000. d. $290,000. 7. Topic A.3.c. Daily costs for Kelso Manufacturing include $1,000 of fixed costs and total variable costs are shown below. Unit Output 10 11 12 13 14 15 Cost $125 $250 $400 $525 $700 $825 The average total cost at an output level of 11 units is a. $113.64. b. $125.00. c. $215.91. d. $250.00.


8. Topic A.4.a. The market for product RK-25 is perfectly competitive. The current market price is $30, and the quantity demanded is 4 million. Due to changes in consumer tastes, a permanent increase in demand for RK-25 is expected in the near term. If nothing else changes in this market, which of the following would be the most feasible levels of short-term and long-term prices?

Short-term Long-terma. $39 $35. b. $35 $39. c. $35 $30. d. $30 $35. stion Number 12 9. Topic A.7.a. Which one of the following components of Gross Domestic Product (GDP) has the greatest fluctuation from year to year? a. Personal consumption expenditures. b. Gross domestic private investment. c. Government spending. d. Net exports. Question 10. Topic A.8.d. Which one of the following statements about leading economic indicators is not true? a. For forecasting purposes, several variables are monitored and a weighted average is referred to

as the index of leading indicators. b. The index of leading indicators has historically been very accurate. c. The use of the index of leading indicators involves monitoring the data on a monthly basis. d. As the nature of the economy has changed, it has been necessary to revise the components of

the index of leading indicators. Questi 11. Topic A.9 .c. One economic theory suggests that a decrease in the federal personal and business income tax rates would lead to an increase in federal income tax revenues. This theory implies that a decrease in tax rates will a. cause the velocity of money to increase. b. have no effect on the federal budget deficit. c. encourage increased production. d. encourage workers to take more vacation time. Qu


12. Topic A.10.c. Which one of the following has an inverse relationship with the demand for money? a. Aggregate income. b. Price levels. c. Interest rates. d. Flow of funds. Qu 13. Topic A.10.f. Which of the following are responsibilities of the Federal Reserve Board? I. Providing a mechanism for the collection of checks. II. Setting fiscal policy. III. Buying government bonds from commercial banks. IV. Setting monetary policy. a. II and IV only. b. I and II only. c. I and IV only. d. I, III, and IV only. Que 14. Topic A.10.f.

The Federal Reserve Board most directly influences a corporation's decision of whether or not to issue debt or equity financing when it revises the a. corporate income tax rate. b. prime rate at which the Federal Reserve Bank lends money to member banks. c. discount rate at which the Federal Reserve Bank lends money to member banks. d. discount rate at which member banks lend money to their customers. ion Number 33 15. Topic A.6.a. Demand-pull inflation occurs when there a. is too much money chasing too few goods. b. are excessive wage increases. c. are rapid increases in raw materials prices. d. are substantial changes in energy prices. Que


16. Topic A.8.a. Economists generally agree that business cycles are caused by changes in a. aggregate expenditures resulting from technological changes, political events, or government

monetary policy. b. stock prices resulting from the need for market corrections, inflation, or government

intervention. c. public expectations about the future direction of prices resulting from government policies.. d. federal government fiscal policy, particularly changes in effective income tax rates. Question 17. Topic A.9.c.

According to fiscal policy principles, a tax increase will a. increase spending and increase aggregate demand. b. increase spending and reduce aggregate demand. c. reduce spending and increase aggregate demand. d. reduce spending and reduce aggregate demand. Quest 18. Topic B.1.c. All of the following are valid reasons for expansion of international business by U.S. multinational corporations, except to a. secure new sources for raw materials. b. find additional areas where their products can be successfully marketed. c. minimize their costs of production. d. protect their domestic market from competition from foreign manufacturers. Que 19. Topic B.1.a. When net exports are negative, there is a net flow of a. goods from firms in foreign countries to the domestic country. b. money from foreign countries to the firms of the domestic country. c. goods from the firms of the domestic country to foreign countries. d. goods and services which result in a trade surplus. Number 20 20. Topic B.2.c. An appreciation of the U.S. dollar against the Japanese yen would a. increase the translated earnings of U.S. subsidiaries domiciled in Japan. b. increase the cost of buying supplies for U.S. firms. c. make U.S. goods more expensive to Japanese consumers. d. make travel in Japan more expensive for U.S. citizens. Questi


21. Topic B.3.c. Which one of the following statements concerning American Depository Receipts (ADRs) is not correct? a. ADRs facilitate the banking procedures for U.S. multinational firms. b. ADRs allow Americans to invest abroad. c. ADRs allow foreigners to raise capital in the U.S. d. ADRs are securities issued by American banks acting as custodians of shares of

foreign firms. 22. Topic B.3.b. A British company currently has domestic operations only. It plans to invest equal amounts of money on projects either in the U.S. or in China. The company will select the country based on risk and return for its portfolio of domestic and international projects taken together. The risk reduction benefits of investing internationally (based on 50% of British domestic operations and 50% foreign operations) will be the greatest when there is perfectly a. positive correlation between the British return and the U.S. return. b. negative correlation between the U.S. return and the Chinese return. c. positive correlation between the U.S. return and the Chinese return. d. negative correlation between the Chinese return and the British return. Ques 23. Topic B.3.b. Direct foreign investment allows firms to avoid a. exposure to political risk. b. the cost of exchange rate fluctuations. c. trade restrictions imposed on foreign companies in the customers’ market. d. domestic regulations on the use of foreign technology. Que 24. Topic B.3.b. Technocrat Inc., located in Belgium, currently manufactures products at its domestic plant and exports them to the U.S. since it is less expensive to produce at home. The company is considering the possibility of setting up a plant in the U.S. All of the following factors would encourage the company to consider direct foreign investment in the U.S. except the a. expectation of more stringent trade restrictions by the U.S. b. depreciation of the U.S. dollar against Belgium’s currency. c. widening of the gap in production costs between the United States and Belgium locations. d. changing demand for the company’s exports to the U.S. due to exchange rate fluctuations. Qu


25. Topic B.3.b. All of the following are concerns that are unique to foreign investments except a. exchange rate changes. b. purchasing power parity. c. changes in interest rates. d. expropriation. 26. Topic B.1. A country has a comparative advantage in producing a good if that country a. can produce the good at a lower absolute cost than any other country. b. can produce the good at a lower opportunity cost than any other country. c. can do a better job than any other country. d. spends less money in out-of-pocket expenses than any other country. 27. Topic C.1.c. Risk assessment is a process a. designed to identify potential events that may affect the entity. b. that establishes policies and procedures to accomplish internal control objectives. c. of identifying and capturing information in a timely fashion. d. that assesses the quality of internal controls throughout the year. 28. Topic C.1.a. When management of the sales department has the opportunity to override the system of internal controls of the accounting department, a weakness exists in a. risk management. b. information and communication c. monitoring. d. the control environment. 29. Topic C.1.b. Segregation of duties is a fundamental concept in an effective system of internal control. Nevertheless, the internal auditor must be aware that this safeguard can be compromised through a. lack of training of employees. b. collusion among employees. c. irregular employee reviews. d. absence of internal auditing.


30. Topic C.2.b. Of the following, the primary objective of compliance testing is to determine whether a. procedures are regularly updated. b. financial statement line items are properly stated. c. controls are functioning as planned. d. collusion is taking place. 31. Topic C.3.c. A company’s management is concerned about computer data eavesdropping and wants to maintain the confidentiality of its information as it is transmitted. The company should utilize a. data encryption. b. dial back systems. c. message acknowledgment procedures. d. password codes. 32. Topic C.3.e. Which one of the following would most compromise the use of the grandfather-father-son principle of file retention as protection against loss or damage of master files? a. Use of magnetic tape. b. Inadequate ventilation. c. Storing of all files in one location. d. Failure to encrypt data. 33. Topic C.3.b. In entering the billing address for a new client in Emil Company’s computerized database, a clerk erroneously entered a nonexistent zip code. As a result, the first month’s bill mailed to the new client was returned to Emil Company. Which one of the following would most likely have led to discovery of the error at the time of entry into Emil Company’s computerized database? a. Limit test. b. Validity test. c. Parity test. d. Record count test.


34. Topic C.2.b. Which one of the following forms of audit is most likely to involve a review of an entity’s performance of specific activities in comparison to organizational specific objectives? a. Information system audit. b. Financial audit. c. Operational audit. d. Compliance audit. 35. Topic C.3.a. To prevent or detect potential fraudulent actions that could result from unexecuted computer program code designed to be activated if an unscrupulous programmer becomes dissatisfied or is terminated, auditors seek to identify and review unexecuted program codes. Auditors can accomplish this through the use of which one of the following methods? a. Regression testing. b. Mapping programs. c. Scanning routines. d. Test data processing. 36. Topic D.1.c. A forecasting technique that is a combination of the last forecast and the last observed value is called a. Delphi. b. least squares. c. regression. d. exponential smoothing. 37. Topic D.5.b. The decision tree method can be applied in conjunction with which of the following decision-making approaches?

I. Expected value. II. Maximum regret. III. Minimax regret.

a. I only. b. I and II only. c. I and III only. d. I, II, and III.


n 38. Topic D.3.b. Vickery Corporation is using network analysis to manage the construction of a small parking area for the City of Regal Hills. Data relating to this project are as follows. Estimated Completion Activity Time (Days) A-B 5 A-C 5 A-D 5 B-E 3 C-G 8 D-F 2 E-G 4 F-H 10 G-H 6 H-I 5 The company's project manager has identified three activity paths for the parking area: ABEGHI, ACGHI, and ADFHI. Because of recent labor problems, Vickery is studying several scheduling options to determine their ultimate impact on the project. Plan 1 - Accept a 1 day delay in completing activity C-G. Plan 2 - Accept a 2 day delay in completing activity D-F. Plan 3 - Accept a 3 day delay in completing activity F-H. Plan 4 - Accept a 1 day delay in completing activity B-E, and a 2 day delay in

completing activity F-H. Which of the following alternatives would result in the least delay and allow Vickery to complete the project on time? a. Plan 2 only. b. Either plan 2 or plan 4. c. Plan 1 only. d. Either plan 1 or plan 3.


39. Topic D.4.b. Carson Products sells sweatshirts and is preparing for a World Cup Soccer match. The cost per sweatshirt varies with the quantity purchased as follows. Quantity Unit cost 4,000 $14.00 5,000 13.50 6,000 13.00 7,000 12.50 Carson must purchase the shirts one month before the game and has analyzed the market and estimated sales levels as follows. Unit sales 4,000 5,000 6,000 7,000 Probability 15% 20% 35% 30% The estimated selling price is $25 for sales made before and at the game day. Any shirts remaining after game day can be sold at wholesale to a local discount store for $10. The expected profit if Carson purchased 6,000 shirts is a. $64,500. b. $66,000. c. $69,000. d. $72,000. 40. Topic D.6.b. When simulating with the Monte Carlo experiment, the average simulated demand over the long run should approximate the a. actual demand. b. real demand. c. sampled demand. d. expected demand.


41. Topic D.5.b. Reshenie Inc. is analyzing the following decision: whether to start an R&D project or purchase a license to produce new types of sensors, the company’s major product. If the decision to conduct R&D in-house is made, the company will have two alternatives: conduct a complex R&D project to create a new product or proceed with a low-cost project to improve the characteristics of existing products. Three levels of demand for sensors are considered: high, medium and low. Expected values of project results (EV) are shown in $ millions. Applying the decision tree analysis, select the best alternative.

Conduct R&D research

Purchase the license

Complex R&D

Low-cost R&D

High demand P=0.8

High demand P=0.7

High demand P=0.6

Medium demand P=0.1

Medium demand P=0.2

Medium demand P=0.1

Low demand P=0.1

Low demand P=0.2

Low demand P=0.2

EV=$20

EV=$16

EV=$9

EV=$15

EV=$19

EV=$14

EV=$12

EV=$18

EV=$17

a. Conduct R&D research, as its expected value is $1.4 million higher than the license purchase

alternative. b. Conduct R&D research, as its expected value is $0.65 million higher than the license purchase

alternative. c. Purchase a license, as its expected value is $0.25 million higher than the R&D alternative. d. Purchase a license, as its expected value is $1.9 million higher than the R&D alternative.


42. Topic D.6.b. Janet Jones, an analyst with All Purpose Heater Company, plans to use a Monte Carlo experiment to estimate the simulated daily demand for All Purpose’s heaters. The probability distribution for the daily demand for heaters, along with the random number intervals assigned to each outcome, are as follows. Daily demand Random number for Heaters Probability intervals 0 .10 00-09 1 .15 10-24 2 .20 25-44 3 .20 45-64 4 .20 65-84 5 .15 85-99 Jones used a total of 100 two-digit numbers for this simulation and generated the following ten random numbers from the table of random number digits. 09, 24, 03, 32, 23, 59, 95, 34, 46, 51 Based on this information, the simulated daily demand for heaters will be a. 2.0. b. 2.5. c. 2.7. d. 3.0. 43. Topic E.5.c. For a given level of sales, and holding all other financial statement items constant, a company’s return on equity (ROE) will a. increase as their debt ratio decreases. b. decrease as their cost of goods sold as a percent of sales decrease. c. decrease as their total assets increase. d. increase as their equity increases. 44. Topic E.6.f In the 20x3 fiscal year, Newman Manufacturing’s gross profit margin remained unchanged from the 20x2 fiscal year. But, in 20x3, the company’s net profit margin declined from the level reached in 20x2. This could have happened because in 20x3 a. corporate tax rates increased. b. cost of goods sold increased relative to sales. c. sales increased at a faster rate than operating expenses. d. common share dividends increased.


45. Topic E.3.a. Last year, Johnson Company’s days-sales-in-receivables was 73 days. This year days-sales-in-receivables is 91.25 days. Over the same time period, sales have declined by 20%. In this period of time, what has happened to the level of Johnson Company’s accounts receivable? a. Accounts receivables have increased. b. Accounts receivable have decreased. c. There has been no change in accounts receivable. d. There is not enough information provided to make a determination. 46. Topic E.3.c. A financial analyst has obtained the following data from Kryton Industries’ financial statements. Cash $200,000 Accounts payable $250,000

Marketable securities 100,000 Income taxes 50,000

Accounts receivable, net 300,000 Accrued liabilities 100,000

Inventories, net 480,000 Current portion of long-

Prepaid expenses 120,000 term debt 200,000

Total current assets $1,200,000 Total current liabilities $600,000 In order to determine Kryton’s ability to pay current obligation, the financial analyst would calculate Kryton’s cash ratio as a. .50. b. .80. c. 1.00. d. 1.20.


47. Topic E.3.c. The following financial information applies to Sycamore Company. Cash $ 10,000 Marketable securities 18,000 Accounts receivable 120,000 Inventories 375,000 Prepaid expenses 12,000 Accounts payable 75,000 Long-term debt - current portion 20,000 Long-term debt 400,000 Sales 1,650,000 What is the acid-test (or quick) ratio for Sycamore?

a. 1.56. b. 1.97. c. 2.13. d. 5.63. 48. Topic E.4.d. A bondholder would be most concerned with which one of the following ratios? a. Inventory turnover. b. Times interest earned. c. Quick ratio. d. Earnings per share. 49. Topic E.5.b. Anderson Cable wishes to calculate their return on assets. You know that the return on equity is 12% and that the debt ratio is 40%. What is the return on assets? a. 4.8%. b. 7.2%. c. 12.0%. d. 20.0%.


50. Topic E.7.c. The Dwyer Company balance sheet indicates that the company has $2,000,000 of 7.5% convertible bonds, $1,000,000 of 9% preferred stock, par value $100, and $1,000,000 common stock, par value $10. The company reported net income of $317,000. The bonds can be converted into 50,000 common shares. The income tax rate is 36%. Which one of the following would Dwyer report as diluted earnings per share? a. $2.11. b. $2.15. c. $2.27. d. $2.51. 51. Topic E.8.f. Consider the following financial statement.

Larsen Manufacturing Inc. Statement of Financial Position

December 31 (in thousands)

Assets: Current Year Current assets $ 8,018 Long-term assets 10,308 Total assets $18,326 Liabilities and shareholders’ equity: Current liabilities $ 998 Long-term debt 3,394 Total liabilities 4,392 Shareholders’ equity: Preferred - 6% cumulative, $100 par, authorized, issued, and outstanding 35,000 shares 3,500 Common - $5 par, 3,000,000 shares authorized, 1,050,000 shares issued and outstanding 5,250 Additional paid-in capital - common 2,625 Retained earnings 2,559 Total shareholders’ equity 13,934 Total liabilities and equity $18,326

Based on the above financial data and assuming that Larsen had no preferred stock dividends in arrears, the company’s book value per share at December 31 of the current year is a. $5.00. b. $7.50. c. $9.94. d. $13.27.


52. Topic E.7.e. Schodack Inc.’s common stock has a market price of $25, a price/earnings ratio of 7.2, and a dividend yield of 5%. The earnings yield and dividend payout ratio, respectively, are closest to Earnings Dividend Yield: Payout Ratio: a. 9% 36% b. 9% 64% c. 14% 36% d. 14% 64% 53. Topic E.1.b. In FASB Statement of Financial Accounting Concepts No. 2, “Qualitative Characteristics of Accounting Information,” comparability is an element of a. relevance only. b. verifiability only. c. both relevance and reliability. d. both verifiability and reliability. 54. Topic E.8.a. Gordon has had the following financial results for the last four years. Year 1 Year 2 Year 3 Year 4Sales $1,250,000 $1,300,000 $1,359,000 $1,400,000 Cost of goods sold 750,000 785,000 825,000 850,000 Gross profit 500,000 515,000 534,000 550,000 Inflation factor 1.00 1.03 1.07 1.10 Gordon has analyzed these results using vertical common-size analysis to determine trends. The performance of Gordon can best be characterized by which one of the following statements? a. The common-size gross profit percentage has decreased as a result of an increasing common- size trend in cost of goods sold. b. The common-size trend in sales is increasing and is resulting in an increasing trend in the common-size gross profit margin. c. The common-size trend in cost of goods sold is decreasing which is resulting in an increasing trend in the common-size gross profit percentage. d. The increased trend in the common-size gross profit percentage is the result of both the increasing trend in sales and the decreasing trend in cost of goods sold.


55. Topic E.2.b. Under which one of the following circumstances would an independent auditor issue a disclaimer of opinion? a. Nonconformity with a generally accepted accounting principle necessary for fair presentation in unusual circumstances. b. A scope limitation imposed by the client that is material to the financial statements taken as a whole. c. Financial statements not presented fairly because of nonconformity with generally accepted accounting principles. d. A scope limitation attributable to inadequate client records which does not affect the financial statements taken as a whole.


ANSWERS – PART 1 SAMPLE QUESTIONS

1. Key = A An improvement in technology increases productivity, thus causing an increase in aggregate supply represented by an upward shift of the supply curve. Economics, McConnell and Brue, 15th ed., p. 218 Learning Outcome Statement: • demonstrate an understanding of the laws of supply and demand • interpret a graph of supply and demand • differentiate between changes in demand and changes in the quantity demanded 2. Key = C Percent change in quantity/Percent change in income = .4/.2 = 2 Economics, McConnell and Brue, 15th ed., pp. 385-386 Learning Outcome Statement: • calculate the income elasticity of demand 3. Key = B Price elasticity of demand = Percent change in quantity demanded/Percent change in price Call waiting Caller ID International Internet Calculation .5/.5 .4/.33 .33/.67 .07/.13 Elasticity 1.00 1.21 .49 .54 Economics, McConnell and Brue, 15th ed., pp. 380 ff Learning Outcome Statement: • calculate the price elasticity of demand 4. Key = B The electrical wholesale market is not competitive because economies of scale are large. A single firm can supply the market at a lower unit cost than many smaller firms. This is an example of a natural monopoly, which the government may choose to regulate in the public interest. Economics, McConnell and Brue, 15th ed., pp. 639-640 Learning Outcome Statement: • demonstrate an understanding of government regulation of natural monopolies 5. Key = D


An increase in supply would tend to lower the price. Economics, McConnell and Brue, 15th ed., p. 212 Learning Outcome Statement: • predict the likely effects of boycotts and cartels on prices and output 6. Key = D Economic profit = Sales revenue – Explicit costs – Implicit costs = $600,000 - $200,000 - $50,000 - $25,000 - $20,000 - $15,000 = $290,000. Economics, McConnell and Brue, 15th ed., p.p. 416-417 Learning Outcome Statement: • identify and calculate economic profit 7. Key = A Total cost/Quantity = Total fixed cost/Quantity + Total variable cost/Quantity ($1000 +250)/11 units = $113.64 Economics, McConnell and Brue, 15th ed., p. 423 Learning Outcome Statement: • identify and calculate total cost, average fixed cost, average variable cost, and average total

cost 8. Key = C In a perfectly competitive market, the increase in demand will result in a temporary increase in price as producers rush to meet supply. But, in equilibrium, the price will settle back down to the current market price (ignoring inflation). Economics, McConnell and Brue, 15th ed., pp. 438 ff Learning Outcome Statement: • demonstrate an understanding of the short-run equilibrium price for the firm and for the

industry in a purely competitive market 9. Key = B Investment is the most volatile component of total spending, shifting significantly from year to year. Economics, McConnell and Brue, 15th ed., p. 170 Learning Outcome Statement: • define Gross Domestic Product (GDP) and demonstrate an understanding of its components 10. Key = B


Although the index of leading economic indicators has correctly identified many business fluctuations historically, at times the index provides false warnings and should be employed with considerable caution. Economics, McConnell and Brue, 15th ed., pp. 239-240 Learning Outcome Statement: • demonstrate an understanding of the index of leading economic indicators as a forecast of GDP 11. Key = C Supply-side economics, represented in part by the Laffer curve, argues that lower marginal tax rates increase the incentive to work, save, and invest. The opportunity cost of leisure would be higher. This triggers expansion of real output and income, thus expanding the tax base. Economics, McConnell and Brue, 15th ed., pp. 317-318 Learning Outcome Statement: • define supply-side fiscal policy • explain the effects of changes in taxation policies, including the effect on the distribution of

income and the effect on resource allocation 12. Key = C As the interest rate increases, demand for money decreases. No interest is earned holding cash. Economics, McConnell and Brue, 15th ed., p. 25 Learning Outcome Statement:• demonstrate an understanding of the relationship between the interest rate and the demand for

money 13. Key = D Functions of the Federal Reserve include issuing currency, setting reserve requirements, lending money to banks, providing for check collection, acting as the fiscal agent for the Federal government, supervising banks, and controlling the money supply (most often by buying and selling government securities). Fiscal policy is conducted by the President and the Congress. Economics, McConnell and Brue, 15th ed., p. 257 Learning Outcome Statement:• identify the role and functions of the Federal Reserve System, including the Board of

Governors and the Federal Open Market Committee, and demonstrate an understanding of how the Fed operates

14. Key = C


The discount rate equals the interest rate charged by the Federal Reserve Banks when lending money to commercial banks. The higher the rate, the more expensive debt financing becomes for corporations, since the banks pass this cost on to their customers. Economics, McConnell and Brue, 15th ed., p. 288 Learning Outcome Statement:• list the tools of monetary policy • demonstrate an understanding of how open-market operations, a change in the reserve ratio,

and/or a change in the discount rate affect the money supply 15. Key = A Demand-pull inflation is caused excess demand bidding up the prices of limited real output. Total spending exceeds the economy’s capacity to produce. Economics, McConnell and Brue, 15th ed., p. 147 Learning Outcome Statement:• define demand-pull inflation and cost-push inflation 16. Key = A Business cycles are primarily caused by changes in the level of total spending. If spending declines, businesses produce less, resulting in lower employment and incomes. When the level of spending increases, businesses produce more, raising the level of output, employment and incomes. Changes in the level of spending can result from technological shifts, major political events, and/or government monetary policy. Economics, McConnell and Brue, 15th ed., pp. 139-140 Learning Outcome Statement: • identify and describe possible causes of business cycles 17. Key = D An increase in taxes reduces household income, thus reducing consumption and decreasing aggregate demand. An increase in taxes also reduces after-tax profits for business, resulting in a decline in investments and aggregate demand. Economics, McConnell and Brue, 15th ed., pp. 207-208 Learning Outcome Statement:• explain the effects of changes in taxation policies, including the effect on the distribution of

income and the effect on resource allocation


18. Key = D Protecting the domestic market from foreign competition is not a valid reason for expansion overseas; all the other options are valid. International Financial Management, Madura, 7th ed., p. 395 Learning Outcome Statement:• determine the gains from trade • define and demonstrate an understanding of the principle of comparative advantage • identify the advantages and disadvantages of free trade 19. Key = A Net exports = Exports less Imports; thus, if negative, imports are greater than exports. Economics, McConnell and Brue, 15th ed., p. 121 Learning Outcome Statement:• define terms commonly associated with global trade, including net exports and net imports 20. Key = C An appreciation of the US$ against the Japanese ¥ means that it would take more Japanese ¥ to purchase US products, thus making it more expensive. Economics, McConnell and Brue, 15th ed., pp. 102-103 Learning Outcome Statement:• infer the effect on the price of goods with a change in the exchange rate 21. Key = A ADR’s are certificates representing ownership of foreign stocks. International Financial Management, Madura, 7th ed., p. 104 Learning Outcome Statement: • define American depository receipt (ADR) umber 10 22. Key = D The firm can reduce its overall risk by diversification into investments that are not highly correlated with its current operations. International Financial Management, Madura, 7th ed., p. 398 Learning Outcome Statement: • identify and explain the benefits of international diversification • calculate the rate of return and the risk profile of an international project resulting in an

increase in corporate diversification


23. Key = C The firm can establish a subsidiary where trade restrictions would otherwise restrict their export sales. International Financial Management, Madura, 7th ed., p. 395 Learning Outcome Statement: • define direct foreign investment and demonstrate an understanding of how it can benefits a

firm 24. Key = C An increasing gap would favor production at home in Belgium because it would be even less expensive. International Financial Management, Madura, 7th ed., p. 395 Learning Outcome Statement: • define direct foreign investment and demonstrate an understanding of how it can benefit a firm • identify and explain the benefits of international diversification 25. Key = C Changes in interest rates are not unique to foreign investments. International Financial Management, Madura, 7th ed., pp. 390 ff Learning Outcome Statement: • recognize the risks of direct foreign investment, including political risk and exchange rate risk 26. Key = B The principle of comparative advantage states that total output will be greatest when each good is produced by the country that has the lowest opportunity cost for that good. Economics, McConnell and Brue, 15th ed., p. 733 Learning Outcome Statement: • define and demonstrate an understanding of the principle of comparative advantage 27. Key = A Risk assessment involves identifying all risks and vulnerabilities that an organization is exposed to. Sawyer’s Internal Auditing, Sawyer, Dittenhofer, and Scheiner, p. 66; pp. 119-120 Learning Outcome Statement: • demonstrate an understanding of risk assessment and risk management 28. Key = D


Control environment includes attitude of management toward the concept of controls. Sawyer’s Internal Auditing, Sawyer, Dittenhofer, and Scheiner, p. 66 Learning Outcome Statement: • recognize how a company’s organizational structure, policies, objectives, and goals, as well as

it’s management philosophy and style, influence the scope and effectiveness of the control environment

29. Key = B Effective segregation of duties means that no single employee has control over authorization, recording and custody. If two or more employees are in collusion, these controls can be overridden. Accounting Information Systems, Romney and Steinbart, pp. 202-204 Learning Outcome Statement: • define and give examples of segregation of duties • recognize that while controls designed to prevent fraud are important and make perpetration of

fraud more difficult, they are not complete insurance against fraud 30. Key = C A compliance audit is a review of controls to see how they conform with established laws, standards, and procedures. Sawyer’s Internal Auditing, Sawyer, Dittenhofer, and Scheiner, p. 30 Learning Outcome Statement: • define a compliance audit and identify its objective 31. Key = A Data encryption, which uses secret codes, ensures that data transmissions are protected from unauthorized tampering or electronic eavesdropping. Accounting Information Systems, Romney and Steinbart, pp. 258-259 Learning Outcome Statement: • define data encryption and describe why there is a much greater need for data encryption when

using the internet 32. Key = C Storing all files in one location undermines the concept of multiple backups inherent in the grandfather-father-son principle. Accounting Information Systems, Romney and Steinbart, pp. 232-234 Learning Outcome Statement: • outline the reasons why all program and data files should be backed up regularly and

frequently and stored at a secure remote site 33. Key = B


A validity test compares data against a master file for accuracy. Data that cannot possibly be correct (e.g., a nonexistent zip code) would be discovered at that time. Accounting Information Systems, Romney and Steinbart, 9th ed., pp. 253-255 Learning Outcome Statement: • identify input controls, processing controls, and output controls and describe why each of these

controls is necessary 34. Key = C Operational audit includes by definition an internal review of the operating performance of specific activities in comparison to organizational goals and/or other specific criteria focused on the economical and efficient use of resources. Sawyer’s Internal Auditing, Sawyer, Dittenhofer and Scheiner, p. 30 Learning Outcome Statement: • define an operational audit and recognize that operational audits are designed to examine and

evaluate systems of internal control and overall company operations 35. Key = B Mapping programs are used to identify those portions of the software application program code that are not executed and not triggered by some event. Accounting Information Systems, Romney and Steinbart, 9th ed., p. 334 Learning Outcome Statement: • identify means by which management can protect programs and databases from unauthorized use 36. Key = D Exponential smoothing combines the last forecast and the last observed value: Ft+1 = aYt + (1 - a)Ft where Ft+1= forecast of the time series for period t+1 Yt = actual value of the time series in period t Ft = forecast of the time series for period t a = smoothing constant. Quantitative Methods for Business, Anderson, Sweeney, and Williams, 9th ed., pp. 181-185 Learning Outcome Statement: • demonstrate an understanding of exponential smoothing


37. Key = D The decision tree method can be applied with or without probabilities. Decision making techniques that do not use probabilities include the minimax regret, maximum regret (conservative), and maximum payoff approaches. A technique that uses probabilities is the expected value approach. Quantitative Methods for Business, Anderson, Sweeney, and Williams, 9th ed., p.need bk Learning Outcome Statement: • define and identify the assumptions of the decision tree analysis technique 38. Key = B

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The three paths are: ABEGHI = 23; ACGHI = 24; and ADFHI = 22. The project critical path is ACGHI = 24 days. Plan 2 leaves the project time intact at 24 days, as it does not increase the critical path. The same is true for plan 4. Quantitative Methods for Business, Anderson, Sweeney, and Williams, 9th ed., pp. 517-522 Learning Outcome Statement:• identify the critical path after a network is developed • calculate the critical path through a network and all the related start, finish, and slack times 39. Key = A Demand

4000 5000 6000 7000* Revenue (orig. sales) 100,000 125,000 150,000 150,000 Cost of shirts 78,000 78,000 78,000 78,000 Wholesale revenue 20,000 10,000 0 0 Profit 42,000 57,000 72,000 72,000 Probability 15% 20% 35% 30% Profit x probability 6,300 11,400 25,200 21,600 Expected profit (sum) 64,500 * Sales limited to 6000, since purchased only 6000 Cost Accounting, a Managerial Emphasis, Horngren, Foster, and Datar, 11th ed., pp. 81-82 Learning Outcome Statement: • calculate the expected value of random variables


40. Key = D The purpose of Monte Carlo simulation is to arrive at average simulated demand, which approximates the average expected demand. Quantitative Methods for Business, Anderson, Sweeney, and Williams, 9th ed., pp. 655-656 Learning Outcome Statement: • demonstrate an understanding of the uses of simulation models, including the Monte Carlo

technique • demonstrate an understanding of how simulations can be used to model and learn about the

behavior of complex systems 41. Key = A There are two alternatives available: do R&D research or buy the license. The expected value of the decision to buy the license = $18 m x 0.7 + $17m x 0.1 + $14 m x 0.2 = $17.1 m. If R&D research is selected, there are two alternatives available: conduct complex R&D or conduct low-cost R&D. A complex R&D expected value = $20 m x 0.8 + $16 m x 0.1 + $9 m x 0.1 = $18.5 m. A low-cost R&D research expected value = $15 m x 0.6 + $19 m x 0.2 + $12 m x 0.2 = $15.2 m. Since the expected value of complex R&D is higher than the expected value of low-cost R&D, Reshenie’s management will choose to conduct complex R&D. Finally, choosing between conducting R&D and buying a license, the expected value of conducting R&D is $1.4 m higher than the expected value of buying a license. Quantitative Methods for Business, Anderson, Sweeney, and Williams, 9th ed., pp. 117-125 Learning Outcome Statement: • construct a decision tree analysis, analyze decisions, and infer results based on the decision

tree 42. Key = A Numbers: 09 24 03 32 23 59 95 34 46 51 Daily demand: 0 1 0 2 1 3 5 2 3 3 Average simulated demand = (0 + 1 + 0 + 2 + 1 + 3 + 5 + 2 + 3 + 3)/10 = 2.0 Quantitative Methods for Business, Anderson, Sweeney, and Williams, 9th ed., pp. 647-652 Learning Outcome Statement: • demonstrate an understanding of the uses of simulation models, including the Monte Carlo

technique • demonstrate an understanding of how simulations can be used to model and learn about the

behavior of complex systems


43. Key = C For a given level of profit and assets, ROE will decrease as the level of debt decreases. As cost of goods sold as a percent of sales decrease, profit will increase along with ROE. As the level of equity increases, ROE will decrease. As total assets increase, ROE will decrease if all other financial statement items are held constant. Financial Statement Analysis, Bernstein, Subrananyam and Wild, 8th ed., pp. 440-444 Learning Outcome Statement: • infer the effect on return on assets of a change in one or more elements of the financial

statements 44. Key = A Increasing taxes will reduce net income after tax and thus the net profit margin. Financial Statement Analysis, Bernstein, Subrananyam and Wild, 8th ed., pp. 20-21 Learning Outcome Statement: • distinguish between gross profit margin, operating profit margin and net profit margin and

analyze the effects of changes in the components of each 45. Key = C Let A/R = Accounts receivable Days sales in receivables = (Accounts receivable x 360)/Sales Assume last year’s sales = $100,000; then this year’s sales = $80,000 73 = (A/R x 360)/$100,000; A/R = $20,278 91.25 = (A/R x 360)/$80,000; A/R = $20,278 Therefore, there is no change in A/R. Financial Statement Analysis, Bernstein, Subrananyam and Wild, 8th ed., pp. 527-528 Learning Outcome Statement: • calculate and interpret accounts receivable turnover and inventory turnover and understand the

effects on these ratios of changes in one or more elements in the financial statement • calculate and interpret days sales in receivables, days sales in inventory, and days purchases in

accounts payable 46. Key = A Cash ratio = (Cash + Marketable securities) / Current liabilities = ($200,000 + $100,000) / $600,000 = 0.50 Financial Statement Analysis, Bernstein, Subrananyam and Wild, 8th ed., p. 526 Learning Outcome Statement: • analyze working capital using the current ratio, the cash ratio, the cash flow ratio, and the cash

to current liabilities ratio


47. Key = A Quick ratio = (cash + marketable securities + accounts receivable)/(accounts payable + current portion of long-term debt) = ($10,000 + $18,000 + $120,000)/($75,000 + $20,000) = 1.558 Financial Statement Analysis, Bernstein, Subrananyam and Wild, 8th ed., pp. 520-521 Learning Outcome Statement: • analyze working capital using the current ratio, the cash ratio, the cash flow ratio, and the cash

to current liabilities ratio 48. Key = B Times-interest-earned ratio reflects the company’s ability to meet interest payments as they come due. Since long-term creditors (bond holders) are interested in the company’s long-run solvency, the times-interest-earned ratio provides a valuable analysis. Financial Statement Analysis, Bernstein, Subrananyam and Wild, 8th ed., pp. 552-553 Learning Outcome Statement: • calculate and interpret the following ratios: earnings to fixed charges, times interest earned,

and cash flow to fixed charges 49. Key= B Return on assets = Return on equity x (1 – Debt ratio) = 12% x 0.60 = 7.2% Financial Statement Analysis, Bernstein, Subrananyam and Wild, 8th ed., pp. 434-436 Learning Outcome Statement: • calculate and interpret the return on total assets ratio and return on common equity ratio 50. Key = B Net Income $317,000 Less: Preferred dividend (90,000)Available to common stock 227,000 Add: Bond interest 150,000 Less: Tax shield (54,000)Adjusted earnings $323,000 Bond interest = $2 million x 7.5%; Tax shield = $150,000 x 36% Potential number of shares = 100,000 common + 50,000 converted = 150,000 Diluted earnings per share = Adjusted earnings/Potential number of shares: $323,000/150,000 = $2.15. Financial Statement Analysis, Bernstein, Subrananyam and Wild, 8th ed., pp. 347-348 Learning Outcome Statement: • calculate and interpret basic and diluted earnings per share


51. Key = C Book value per share = (Total shareholders’ equity less preferred equity)/Common stock outstanding = ($13,934 – $3,500)/1,050 = $9.94 Financial Statement Analysis, Bernstein, Subrananyam and Wild, 8th ed., pp. 173-174 Learning Outcome Statement: • calculate and interpret book value per share 52. Key = C

Earnings yield = Earnings per share Market price per share Price earnings ratio = Market price per share Earnings per share (EPS) 7.2 = 25 ; EPS = 3.4722 EPS Earnings yield = 3.4722 = 13.9% or 14% 25 Dividend payout ratio = Cash dividends paid per share Earnings per share Dividend yield = Cash dividends paid per share Market price per share 5% = Cash dividend 25 Cash dividends per share = $1.25 Dividend payout ratio = 1.25 = 36% 3.4722

Financial Statement Analysis, Bernstein, Subrananyam and Wild, 8th ed., pp. 603-605 Learning Outcome Statement: • calculate and interpret the fundamental valuation multiples of the price/book ratio and the price/earnings ratio • calculate and interpret basic and diluted earnings per share • calculate and interpret earnings yield, dividend yield, and dividend payout


53. Key = C Comparability involves two or more items of information; it is a secondary quality that is an element of both the primary qualities of relevance and reliability. Intermediate Accounting, 9th ed., Nikolai and Bazley, p. 34 Learning Outcome Statement: • distinguish between the primary qualities of relevance and reliability and the secondary

qualities of comparability and consistency 54. Key = A Common-size %

Year 1 Year 2 Year 3 Year 4Gross Profit as % of Sales 40.0% 39.6% 39.3% 39.3% Cost of Goods Sold as % of Sales 60.0% 60.4% 60.7% 60.7%

Financial Statement Analysis, Bernstein, Subrananyam and Wild, 8th ed., pp. 27-29 Learning Outcome Statement: • analyze common-size statements 55. Key = B A disclaimer of opinion is issued when auditors are unable to satisfy themselves that the financial statements are presented fairly. A scope limitation would preclude the auditors from expressing an opinion because they are limited by the client in performing the audit under generally accepted auditing standards. Auditing and Assurance Services, 9th ed., Arens, Elder and Beasley, p. 54 Learning Outcome Statement: • identify the type of audit report that would be issued given a specific set of facts


Content Specification Outline

CMA Examination Part 1 - Business Analysis

A. Business Economics (25% - Level B)

1. Factors affecting the individual firm a. The laws of supply and demand b. Elasticity of demand and elasticity of supply c. Government intervention in market operations d. U.S. antitrust policies

2. Consumption of goods a. Marginal utility theory b. Indifference curve analysis

3. Production cost functions a. Economic costs b. Economic profits c. Production costs in the short run d. Production costs in the long run e. Economies and diseconomies of scale

4. Market structures and pricing a. Pure competition b. Monopoly c. Monopolistic competition d. Oligopoly e. Effects of boycotts and cartels on prices and output

5. The economy as a system of markets a. Production and demand for economic resources b. The labor market

6. Issues in Macroeconomics a. Inflation b. Employment and unemployment c. Economic growth

7. Domestic Output, National Income, and Price Levels a. Gross domestic product b. Other national accounts c. Price levels

8. Business cycles a. Nature of business cycles b. Terminology used to explain business cycles c. Reasons for fluctuations d. Leading economic indicators

9. Fiscal policy a. Theory of fiscal policy b. Tools of fiscal policy c. Taxation policies


10. Money and monetary policy a. Nature of money b. Creation of money c. Money supply and the demand for money d. Relationship between money and national income e. The Federal Reserve Board f. Instruments and objectives of monetary policy

B. Global Business (20% - Level B) 1. Global trade

a. Trade terminology b. Comparative advantage in trade c. Free trade d. Tariffs e. Non-tariff trade barriers f. International agreements on trade and tariffs

2. Foreign exchange a. Balance of payments b. Trade deficits and surpluses c. Fixed, flexible and floating exchange rates

3. Other global topics a. World Bank and International Monetary Fund b. International capital investments c. Financing international trade d. Transfer pricing e. Legal and ethical issues in global business

C. Internal Controls (15% - Level A) 1. Risk assessment and controls

a. Internal control structure and management philosophy b. Internal control policies for safeguarding and assurance c. Internal control risk d. U.S. Foreign Corrupt Practices Act internal control requirements

2. Internal auditing a. Responsibility and authority of the internal audit function b. Types of audits conducted by internal auditors c. Internal audit assistance provided to management

3. Systems controls and security measures a. General accounting system controls b. Application and transaction controls c. Network controls d. Flowcharting to assess controls e. Backup controls f. Disaster recovery procedures


D. Quantitative Methods (15% - Level B)

1. Forecasting analysis a. Regression analysis b. Learning curve analysis c. Exponential smoothing d. Time series analysis

2. Linear programming a. Scarce resource considerations b. Capacity constraints

3. Network analysis a. Critical Path Method (CPM) b. Program Evaluation Review Technique (PERT)

4. Probability concepts a. Probability distribution tables b. Expected value

5. Decision tree analysis a. Assumptions of decision tree analysis b. Estimating cash flow and probability values

6. Other quantitative techniques a. Sensitivity analysis b. Simulation c. Queuing theory d. Markov process

E. Financial Statement Analysis (25% - Level B) 1. Development of accounting standards

a. Due process in developing U.S. accounting standards b. Qualitative characteristics of accounting information c. Role of the SEC in U.S. standard setting d. User groups that influence accounting standards e. Types of pronouncements issued f. International Accounting Standards Board

2. Financial statement assurance a. Auditor and management responsibilities b. Audit reports

3. Short-term liquidity a. Working capital analysis b. Operating activity analysis c. Other ratios and liquidity

4. Capital structure and solvency a. Capital structure analysis b. Solvency analysis c. Asset-based measures d. Earnings coverage e. Other ratios and solvency measures


5. Return on invested capital

a. Components of return on invested capital b. Return on assets c. Return on common equity d. Other measures of return and capital growth

6. Profitability analysis a. Income measurement analysis b. Revenue analysis c. Cost of sales analysis d. Expense analysis e. Variation analysis f. Other ratios and profitability measures

7. Earnings-based analysis a. Earnings quality b. Earnings persistence c. Earnings-based valuation d. Earnings power and forecasting e. Other ratios and earnings measures

8. Other analytical issues a. Common-size statements b. International considerations c. Effects of changing prices and inflation d. Limitations of ratio analysis e. Accounting versus economic profit/value f. Market value versus book value g. Non-financial considerations


STANDARDS OF ETHICAL CONDUCT FOR MEMBERS In today's modern world of business, individuals in management accounting and financial management constantly face ethical dilemmas. For example, if the accountant's immediate superior instructs the accountant to record the physical inventory at its original costs when it is obvious that the inventory has a reduced value due to obsolescence, what should the accountant do? To help make such a decision, here is a brief general discussion of ethics and the "Standards of Ethical Conduct for Members." Ethics, in its broader sense, deals with human conduct in relation to what is morally good and bad, right and wrong. To determine whether a decision is good or bad, the decision-maker must compare his/her options with some standard of perfection. This standard of perfection is not a statement of static position but requires the decision-maker to assess the situation and the values of the parties affected by the decision. The decision-maker must then estimate the outcome of the decision and be responsible for its results. Two good questions to ask when faced with an ethical dilemma are, "Will my actions be fair and just to all parties affected?" and "Would I be pleased to have my closest friends learn of my actions?" Individuals in management accounting and financial management have a unique set of circumstances relating to their employment. To help them assess their situation, the Institute of Management Accountants (IMA) has developed the following "Standards of Ethical Conduct for Members." STANDARDS OF ETHICAL CONDUCT: Members of IMA have an obligation to the public, their profession, the organizations they serve, and themselves, to maintain the highest standards of ethical conduct. In recognition of this obligation, the IMA has promulgated the following standards of ethical conduct for its members. Members shall not commit acts contrary to these standards nor shall they condone the commission of such acts by others within their organizations. Members shall abide by the more stringent code of ethical conduct, whether that is the standards widely practiced in their country or IMA’s Standards of Ethical Conduct. In no case will a member conduct herself or himself by any standard that is not at least equivalent to the standards identified for members in IMA’s Standards of Ethical Conduct. The standards of ethical conduct for IMA members are published in SMA 1C (Statement on Management Accounting).


COMPETENCE Members have a responsibility to:

• Maintain an appropriate level of professional competence by ongoing development of their knowledge and skills.

• Perform their professional duties in accordance with relevant laws, regulations, and technical standards.

• Prepare complete and clear reports and recommendations after appropriate analyses of relevant and reliable information.

CONFIDENTIALITY Members have a responsibility to:

• Refrain from disclosing confidential information acquired in the course of their work except when authorized, unless legally obligated to do so.

• Inform subordinates as appropriate regarding the confidentiality of information acquired in the course of their work and monitor their activities to assure the maintenance of that confidentiality.

• Refrain from using or appearing to use confidential information acquired in the course of their work for unethical or illegal advantage either personally or through third parties.

INTEGRITY Members have a responsibility to:

• Avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict.

• Refrain from engaging in any activity that would prejudice their ability to carry out their duties ethically.

• Refuse any gift, favor, or hospitality that would influence or would appear to influence their actions.

• Refrain from either actively or passively subverting the attainment of the organization's legitimate and ethical objectives.

• Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity.

• Communicate unfavorable as well as favorable information and professional judgments or opinions.

• Refrain from engaging in or supporting any activity that would discredit the profession.

OBJECTIVITY Members have a responsibility to:

• Communicate information fairly and objectively. • Disclose fully all-relevant information that could reasonably be expected to

influence an intended user's understanding of the reports, comments, and recommendations presented.

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RESOLUTION OF ETHICAL CONFLICT In applying the standards of ethical conduct, members may encounter problems in identifying unethical behavior or in resolving an ethical conflict. When faced with significant ethical issues, members should follow the established policies of the organization bearing on the resolution of such conflict. If these policies do not resolve the ethical conflict, such members should consider the following courses of action.

• Discuss such problems with the immediate superior except when it appears that the superior is involved, in which case the problem should be presented initially to the next higher managerial level. If a satisfactory resolution cannot be achieved when the problem is initially presented, submit the issues to the next higher managerial level. If the immediate superior is the chief executive officer, or equivalent, the acceptable reviewing authority may be a group such as the audit committee, executive committee, board of directors, board of trustees, or owners. Contact with levels above the immediate superior should be initiated only with the superior's knowledge, assuming the superior is not involved. Except where legally prescribed, communication of such problems to authorities or individuals not employed or engaged by the organization is not considered appropriate.

• Clarify relevant ethical issues by confidential discussion with an objective advisor (e.g., IMA Ethics Counseling service) to obtain a better understanding of possible courses of action. - Consult your own attorney as to legal obligations and rights concerning the ethical conflict.

• If the ethical conflict still exits after exhausting all levels of internal review, there may be no other recourse on significant matters than to resign from the organization and to submit an informative memorandum to an appropriate representative of the organization. After resignation, depending on the nature of the ethical conflict, it may also be appropriate to notify other parties.

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