To provide candidates with a brief view of some of the types of questions on the CMA^® (Certified Management Accountant) exam, here are five questions – with correct answers and explanations for each.

CMA Exam Part 1:

1. When using the statement of cash flows to evaluate a company’s continuing solvency, the most important factor to consider is the cash

1. balance at the end of the period.
2. flows from (used for) operating activities.
3. flows from (used for) investing activities.
4. flows from (used for) financing activities.

Correct answer b. A company’s solvency is best represented by the amount of cash that can be generated internally rather than having to borrow from outside sources. This is shown on the Cash Flow Statement as flows from operating activities.

2. 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

1. star.
2. cash cow.
3. question mark.
4. dog. 

Correct answer b. Product ABC is an example of a cash cow. It is a high-market share (dominating the market for the past decade) but low growth (continuously slowing down) product. It also generates a huge amount of cash flows.

3. A company has a direct labor price variance that is favorable. Of the following, the most serious concern the company may have about this variance is that

1. the circumstances giving rise to the favorable variance will not continue in the future.
2. the production manager may not be using human resources as efficiently as possible.
3. the cause of the favorable variance may result in other larger unfavorable variances in the value-chain.
4. actual production is less than budgeted production.

Correct answer c. A favorable direct labor price variance could indicate that lower-skilled labor is being used than what was planned.  This could lead to unfavorable labor use and material usage variances that more than offset the favorable price variance.

CMA Exam Part 2:

4. A public company’s shareholders expect to receive a dividend one year from now of $20 per share. Immediately after the dividend payout, analysts are expecting that the stock will trade at $244 per share. If the investors have a required rate of return of 20%, what is the current value of the stock?

1. $220.
2. $224.
3. $244.
4. $264.

Correct answer a.
Current price = (Expected future price + Next dividend)/(1+required rate of return)
Current price = ($244+20)/(1+0.2)=$264/1.2=$220

5. A detergent company sells large containers of industrial cleaner at a selling price of $12 per container. Each container of cleaner requires $4.50 of direct materials, $2.50 direct labor, and $1.00 of variable overhead. The company has total fixed costs of $2,000,000 and an income tax rate of 40%. Management has set a goal to achieve a targeted after-tax net income of $2,400,000. What amount of dollar sales must the company achieve in order to meet its goal?

1. $14,400,000.
2. $18,000,000.
3. $22,000,000.
4. $24,000,000.

Correct answer b.
b. Volume to reach targeted net income =
[fixed costs + (target after tax income / (1 – tax rate))] / unit contribution margin
unit contribution margin = price – variable costs
Volume to reach targeted net income =
[$2,000,000 + ($2,400,000 / (1 – 0.40))] / ($12 - $4.50 - $2.50 - $1.00) = 1,500,000 containers
1,500,000 containers * $12 per container = $18,000,000 of dollar sales to reach targeted net income