CMA financial decision making

SIXTEENTH
EDITION

Review
Part 2
Financial Decision Making

Irvin N. Gleim • Dale L. Flesher


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Garrett Gleim, B.S., CPA (not in public practice), is a graduate of the Wharton School at the University
of Pennsylvania. Mr. Gleim coordinated the production staff, reviewed the manuscript, and provided
production assistance throughout the project.

Grady M. Irwin, J.D., is a graduate of the University of Florida College of Law, and he has taught in the
University of Florida College of Business. Mr. Irwin provided substantial editorial assistance
throughout the project.
John F. Rebstock, B.S.A., is a graduate of the Fisher School of Accounting at the University of Florida.
He has passed the CIA and CPA exams. Mr. Rebstock reviewed portions of the manuscript.
Kristina M. Rivet, CPA, graduated cum laude from Florida International University. She has extensive
public accounting experience in the areas of financial accounting, tax, and consulting. Ms. Rivet
provided substantial editorial assistance throughout the project.
Stewart B. White, B.M., cum laude, University of Richmond, B.S., Virginia Commonwealth University,
has passed the CPA, CIA, and CISA exams and has worked in the fields of retail management,
financial audit, IT audit, COBOL programming, and data warehouse management. Mr. White
provided substantial editorial assistance throughout the project.

A PERSONAL THANKS
This manual would not have been possible without the extraordinary effort and dedication of Jacob
Brunny, Julie Cutlip, Kate Devine, Eileen Nickl, Teresa Soard, Joanne Strong, and Candace Van Doren,
who typed the entire manuscript and all revisions and drafted and laid out the diagrams and illustrations
in this book.
The authors appreciate the production and editorial assistance of Katie Anderson, Alexander
Karnazes, Katie Larson, Cary Marcous, Jean Marzullo, Shane Rapp, Drew Sheppard, Katie Wassink,
and Martha Willis.
The authors also appreciate the critical reading assistance of Brett Babir, Ellen Buhl, Lauren Bull,
Reed Daines, Lawrence Lipp, and Kristina Schoen.
Finally, we appreciate the encouragement, support, and tolerance of our families throughout this
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SIXTEENTH EDITION

Part 2
by
Irvin N, Gleim, Ph.D., CPA, CIA, CMA, CFM
i
and
Dale L. Flesher, Ph.D., CPA, CIA, CMA, CFM

ABOUT THE AUTHORS
Irvin N. Gleim is Professor Emeritus in the Fisher School of Accounting at the University of
Florida and is a member of the American Accounting Association, Academy of Legal Studies in
Business, AICPA, Association of Government Accountants, Florida Institute of CPAs, The IIA,
and the IMA. He has had articles published in the Journal o f Accountancy, The Accounting
Review, and The Am erican Business Law Journal and is author/coauthor of numerous
accounting and aviation books and CPE courses.
Dale L. Flesher is the Arthur Andersen Alumni Professor in the School of Accountancy at
the University of Mississippi and has written over 300 articles for business and professional
journals, including Managem ent Accounting, Journal o f Accountancy, and The Accounting
Review, as well as numerous books. He is a member of the IMA, AICPA, The IIA, American
Accounting Association, and American Taxation Association. He is a past editor of The
Accounting H istorians’ Journal and is a trustee and past president of the Academ y of
Accounting Historians. He is currently the vice president of finance for the American
Accounting Association. In 2011, he received the A lC P A ’s highest award for educators, The
Distinguished Performance in Accounting Education Award, which is a lifetime achievement
award. Previously, in 1990, he received The Institute of Internal Auditors Radde Award as the
Outstanding Auditing Educator worldwide.

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ACKNOWLEDGMENTS
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Institute of Certified Management Accountants, are reprinted and/or adapted with permission.
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1996 by The Institute of Internal Auditors, Inc.
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V

TABLE OF CONTENTS

.

Page
Preface for CMA Part 2 Candidates........................................... . ................. ....................... . . ...........
vi
Preparing for and Taking the CMA E x a m ............................. .............................................................
1
Study Unit 1. Ethics For the Organization and Basic Financial Statements ...................... ....... ....
17
Study Unit 2. Ratio Analysis .......................... ............... . . ......... .................... ......................... .........
59
Study Unit 3. Profitability Analysis and Analytical Issues ........ .............. ............................... — . 91
Study Unit 4. Investment Risk and Portfolio Management ....... ............. ............. ............. ............. ............. ............. .....
Study Unit 5. Financial Instruments and Cost of Capital . . . . . . . . . . . . . . . . . . . . . — ............... 173
Study Unit 6. Managing Current Assets .........
— ............................. . . . . — ................. 215
Study Unit 7. Raising Capital, Corporate Restructuring, and InternationalFinance. . . . . . . . . . . . 253
Study Unit 8. CVP Analysis and Marginal Analysis . . . . — ........... ..... . . . ........................... .. 313
Study Unit 9. Decision Analysis and Risk Management . . . . . . . . . . .
............................... 343
Study Unit 10. Investment Decisions . . . . . . . . — ....................... ....
................................ 387
Appendix A: ICMA
Content Specification Outlinesand Cross-References ......... ........... ...... 429
Appendix B: ICMA
Suggested Reading List ............................................................................... 437
Appendix C: Types
and Levels of Exam Q uestions.................................................................... 439
Index ....................................................................................................................................................... 445
Order F o rm .............................................................................................................................................. 457

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PREFACE FOR CMA PART 2 CANDIDATES
The purpose of this book is to help you prepare yourself to pass Part 2 of the two-part CMA
examination. The overriding consideration is to provide an inexpensive, effective, and easy-to-use
study program. This manual
1.
2.
3.
4.

5.

Explains how to optimize your grade by focusing on Part 2 of the CMA exam.
Defines the subject matter tested on Part 2 of the CMA exam.
Outlines all of the subject matter tested on Part 2 in 10 easy-to-use-and-complete study
units.
Presents multiple-choice and essay questions from past CMA examinations to prepare you
for questions in future CMA exams. The multiple-choice answer explanations are
presented to the immediate right of each question for your convenience. Use a piece of
paper to cover our explanations as you study the questions.
Suggests exam-taking and question-answering techniques to help you maximize your exam
score.

The outline format, the spacing, and the question-and-answer formats in this book are designed to
facilitate readability, learning, understanding, and success on the CMA exam. Our most successful
candidates use the Gleim CMA Review System*, which includes books, Test Prep Software, Audio
Review, Gleim Online, Essay Wizard, FREE Practice Exams (available Summer 2012), and access to a
Personal Counselor; or a group study CMA review program. (Check our website for live courses we

recommend.) This review book and all Gleim CMA Review materials are compatible with other CMA
review materials and courses that are based on the ICMA’s Content Specification Outlines.
To maximize the efficiency and effectiveness of your CMA review program, augment your studying
with CMA Review: A System for Success. This booklet has been carefully written and organized to
provide important information to assist you in passing the CMA examination.
Thank you for your interest in our materials. We deeply appreciate the thousands of letters and
suggestions we have received from CIA, CMA, CPA, and EA candidates and accounting students and
faculty during the past 5 decades.
If you use Gleim materials, we want YOUR feedback immediately after the exam and as soon as
you have received your grades. The CMA exam is NONDISCLOSED, and you must maintain the
confidentiality and agree not to divulge the nature or content of any CMA question or answer under any
circumstances. We ask only for information about our materials, i.e., the topics that need to be added,
expanded, etc.
Please go to www.gleim.com/feedbackCMA2 to share your suggestions on how we can improve
this edition.

Good Luck on the Exam,
Irvin N. Gleim
DaleL.FIesher


1

PREPARING FOR AND TAKING THE CMA EXAM

Transition to Two-Part Exam ............................................................................................
Follow These Steps to PASS the Exam ...........................................................................
Introduction to CMA ............................................. ..........................................................
Overview of the CMA Examination .......................... ........................... ............................
Subject Matter for Part 2

........................................ ................ ............. ...........
Learning Outcome Statements ........................................................................................
Which Pronouncements Are Tested? ..............................................................................
How Ethics Are Tested ....................................................................................................
Nondisclosed Exam ............. , , , ................... .. „,, — , — . , , . . — ....................
The ICMA’s Requirements for CMA Designations .................... ......................................
CMA Exam F e e s .................................. ............. ......... ......................... .................... ..
Maintaining Your CMA Designation..................................... ........................ ...................
Eligibility Period............................ .................... .................. ...................................

1
3
3
4
4
4
4
4
5
5
6

Preliminary Testing: Gleim CMA Diagnostic Quizzes — ......................... ................ ...
How to Study a Study Unit Using the Gleim Review System ............................ ........... ...

8
8

Gleim Books ........................... ..................... ........................ ......................... ...............
CMA Test Prep Software..................................................................................................

Studying with Books and Software ............................... ...................................................
Gleim Audio Reviews ......................................................................................................
Final Review: Gleim CMA Practice Exam ................................ ....................... .............
Time-Budgeting and Question-Answering Techniques for the E xa m .................................
Essay Questions ....................................................................................... .....................
Essay Grading ................................................................................................................
How to Be in Control while Taking the E xam ..................................... ...............................

10
11
11
12
12
12
14
16
16

2

6

TRANSITION TO TWO-PART EXAM
In 2010, the ICMA changed the CMA program from a four-part to a two-part exam. Candidates are
now able to enter only into the two-part program; i.e., old exam Parts 1, 2, 3, and 4 are no longer
available to complete.
Candidates who previously began the four-part exam process can transition to the new exam. If
they passed old Part 2, they only have to pass new Part 2 to complete the CMA. If they passed old
Part 3, they only have to pass new Part 1 to complete the CMA. If both old Parts 2 and 3 were passed,
a 2-hour transition exam must be taken to complete the CMA. The Transition Exam will be available

until February 28, 2013.


2

Preparing for and Taking the CMA Exam

FOLLOW THESE STEPS TO PASS THE EXAM
1.

Read this Introduction to familiarize yourself with the content and structure of Part 2 of the
CMA exam. In the following pages, you will find
a.

2.

b.

An overview of Part 2 and what it generally tests, including the ICMA’s Content
Specification Outlines (CSOs)
A detailed plan with steps to obtain your CMA certification, including

c.

1) The order in which you should apply, register, schedule your exam, and buy your
study materials
2) The studying tactics on which you should focus
3) How to organize your study schedule to make the most out of each resource in
the Gleim CMA Review System (i.e., books, Test Prep Software Download,
Audio Review, Gleim Online, Essay Wizard, Diagnostic Quizzes, Practice

Exams, etc.)
Tactics for your actual test day, including

1) Time budgeting, so you complete all questions with time to review
2) Question-answering techniques to obtain every point you can
3) An explanation of how to be in control of your CMA exam
Scan the Gleim CMA Review: A System for Success booklet and note where to revisit
later in your studying process to obtain a deeper understanding of the CMA exam.

a.

CMA Review: A System for Success has seven study units:
Study Unit 1:
Study Unit 2:
Study Unit 3:
Study Unit 4:
Study Unit 5:
Study Unit 6:
Study Unit 7:

3.

The CMA Examination: An Overview and Preparation Introduction
ICMA Content Specification Outlines
Content Preparation, Test Administration, and Performance Grading
Multiple-Choice Questions
Essay Questions
Preparing to Pass the CMA Exam
How to Take the CMA Exam

BEFORE you begin studying, take a Diagnostic Quiz at www.gleim.com/cmadiagnosticquiz
or use our Gleim Diagnostic Quiz App for iPhone, iPod Touch, and Android.
a.

4.

The Diagnostic Quiz includes a representative sample of 40 multiple-choice questions
and will determine your weakest areas in Part 2.
b. When you are finished, one of our Personal Counselors will consult with you to better
focus your review on any areas in which you have less confidence.
Follow the steps outlined on page 8, “How to Study a Study Unit Using the Gleim CMA
Review System.” This is the study plan that our most successful candidates adhere to.
Study until you have reached your desired proficiency level (e.g., 75%) for each study
unit in Part 2.
a.

b.

As you proceed, be sure to check any Updates that may have been released.
1) Gleim Online and Essay Wizard are updated automatically.
2) Test Prep Software is updated by the Online Library Updates system in the
Tools menu of your Test Prep. You can (and should) set your Test Prep to
automatically update at least once a month.
3) Book updates can be viewed at www.gleim.com/updates, or you can have them
emailed to you. See the information box in the top right corner of page iv for
details.
Review the CMA Review: A System for Success booklet and become completely
comfortable with what will be expected from you on test day.

Preparing for and Taking the CMA Exam

5.

3

Shortly before your test date, take a Practice Exam (complimentary with the purchase of the
complete Gleim CMA Review System!) at www.gleim.com/cmapracticeexam (available
Summer 2012).
a.

6.

This timed and scored exam emulates the actual CMA exam and tests you not only on
the content you have studied, but also on the question-answering and timemanagement techniques you have learned throughout the Gleim study process.
b. When you have completed the exam, study your results to discover where you should
focus your review during the final days before your exam.
Take and PASS Part 2 of the CMA exam!
a.

When you have completed the exam, please contact Gleim with your suggestions,
comments, and corrections. We want to know how well we prepared you for your
testing experience.

INTRODUCTION TO CMA
CMA is the acronym for Certified Management Accountant. The CMA examination is developed
and offered by the Institute of Certified Management Accountants (ICMA) in numerous domestic and
international locations.
According to the IMA, the “CMA is the advanced professional certification specifically designed to
measure the accounting and financial management skills that drive business performance.”

OVERVIEW OF THE CMA EXAMINATION
The total exam is 8 hours of testing. It is divided into two parts, as follows:
Part 1 - Financial Planning, Performance, and Control
Part 2 - Financial Decision Making
Each part consists of 100 multiple-choice questions and 2 essay scenarios, and testing lasts
4 hours (3 hours for the multiple-choice questions plus 1 hour for the essays). The exams are only
offered during the following three testing windows: January/February, May/June, and
September/October.
The CMA exam is computerized to facilitate easier testing. Prometric, the testing company that the
IMA contracts to proctor the exams, has hundreds of testing centers worldwide. The Gleim Test Prep
Software, Gleim Online, Gleim Essay Wizard, and Gleim CMA Practice Exams provide exact exam
emulations of the Prometric computer screens and procedures to prepare you to PASS.


4

Preparing for and Taking the CMA Exam

SUBJECT MATTER FOR PART 2
Below, we have provided the ICMA’s abbreviated Content Specification Outline (CSO) for Part 2.
The percentage coverage of each topic is indicated to its right. We adjust the content of our materials
to any changes in the CSO.
Candidates for the CMA designation are expected to have a minimum level of business knowledge
that transcends both examination parts. This minimum level includes knowledge of basic financial
statements, time value of money concepts, and elementary statistics. Specific discussion of the ICMA’s
Levels of Performance (A, B, and C) is provided in Appendix C, which is a reprint of the ICMA’s
discussion of “Types and Levels of Exam Questions.”
Part 2: Financial Decision Making
Financial Statement Analysis
Corporate Finance

Decision Analysis and Risk Management
Investment Decisions
Professional Ethics

25%
25%
25%
20%

5%

Appendix A contains the CSOs in their entirety as well as cross-references to the subunits in our
text where topics are covered. Remember that we have studied and restudied the CSOs in developing
our CMA Review materials. Accordingly, you do not need to spend time with Appendix A. Rather, it
should give you confidence that Gleim CMA Review is the best review source available to help you
PASS the CMA exam.
LEARNING OUTCOME STATEMENTS
In addition to the Content Specification Outlines, the ICMA has published Learning Outcome
Statements (LOSs) that specify in detail what skills a candidate should possess. Before you study our
knowledge transfer outline, read the LOS at the beginning of each study unit. This will alert you to what
is expected and required of you.
WHICH PRONOUNCEMENTS ARE TESTED?
New pronouncements are eligible to be tested on the CMA exam in the testing window beginning
1 year after a pronouncement’s effective date.
HOW ETHICS ARE TESTED
Ethical issues and considerations are tested from the perspective of the'individual in Part 1 and
from the perspective of the organization in Part 2. Candidates will be expected to evaluate the issues
involved and make recommendations for the resolution of the situation.
NONDISCLOSED EXAM
As part of the ICMA’s nondisclosure policy and to prove each candidate’s willingness to adhere to

this policy, a confidentiality agreement must be accepted by each candidate before each part is taken.
This statement is reproduced here to remind all CMA candidates about the ICMA’s strict policy of
nondisclosure, which Gleim consistently supports and upholds.
I hereby attest that I will not divulge the content o f this examination, nor will I remove any examination
materials, notes or other unauthorized materials from the examination room. I understand that failure to
comply with this attestation may result in invalidation o f my grades and disqualification from future
examinations. For those already certified by the Institute o f Certified Management Accountants, failure to
comply with the statement will be considered a violation o f the IMA’s Statement o f Ethical Professional Practice
and could result in revocation o f the certification.


5

Preparing for and Taking the CMA Exam

THE ICMA’S REQUIREMENTS FOR CMA DESIGNATIONS
The CMA designation is granted only by the ICMA. Candidates must complete the following steps
to become a CMA:
1.

2.
3.
4.
5.

Become a member of the IMA, enter the certification program, and register for the part(s)
you are going to take. The CMA Review: A System for Success booklet contains concise
instructions on the membership and certification application and registration processes and
a useful worksheet to help you keep track of your process and organize what you need for
exam day. Detailed instructions and screenshots for those steps can also be found at

www.gleim.com/accounting/cma/steps.
Pass both parts of the exam within 3 years.
Satisfy the education requirement.
Satisfy the experience requirement.
Comply with the IMA’s Statement of Ethical Professional Practice.

Upon completion of all requirements, the ICMA will issue a numbered CMA certificate. To keep
the certificate, a CMA must (1) maintain active membership in the IMA and pay the annual CMA
maintenance fee, (2) fulfill the requirements for continuing professional education, and (3) continue to
comply with the IMA’s Statement of Ethical Professional Practice and all applicable state laws.
CMA EXAM FEES
1.

IMA Membership Fees: IMA membership is required for all CMA candidates. There are four
types of membership: Regular, Student, Young Professional, and Academic. Fees for IMA
members include a one-tim^ membership application fee (for all new members except
Students and Young Professionals) and an annual membership renewal fee. Members
who have passed the CMA exam will also need to pay an annual maintenance fee, due at
the same time as the renewal fee.
Go to www.gleim.com/CMAfees for the most current IMA membership fees.

2.

CMA Certification Fees:
Entrance Fee

Exam Fee
One Part/Window

Exam Fee

Both Parts/Window

Rescheduling/
Cancelation Fee *

Regular

$225

$350

$300

$50

Student

$75

$175

$125

$50

Academic

$75

$175

$125

$50

*This fee is applicable to candidates who reschedule/cancel their exam within 30 days of their
appointment. Prior to 30 days, there is no penalty.


6

Preparing for and Taking the CMA Exam

MAINTAINING YOUR CMA DESIGNATION
When you have completed all requirements, you will be issued a numbered CMA certificate. This
certificate is the property of the ICMA and must be returned upon request. To maintain your certificate,
membership in the IMA is required. The annual CMA maintenance fee for regular members is $30.
You are also required to comply with the IMA’s Statement of Ethical Professional Practice. The final
requirement is continuing professional education (CPE).
Beginning the calendar year after successful completion of the CMA exams, 30 hours of CPE must
be completed, which is about 4 days per year. Qualifying topics include management accounting,
corporate taxation, statistics, computer science, systems analysis, management skills, marketing,
business law, and insurance. All CMAs are required to complete 2 hours of CPE on the subject of
ethics as part of their 30-hour annual requirement.
ELIGIBILITY PERIOD
Candidates must register for an exam part within the first 12 months after being admitted to the
Certification Program. In addition, all candidates are required to pass both parts of the exam within
3 years of being admitted to the CMA program. If a candidate is not able to pass both parts within this
time period, the Certification Entrance Fee will have to be repaid and the passed part will have to be
retaken.

STEPS TO BECOME A CMA
1.
2.

Become knowledgeable about the exam, and decide which part you will take first.
Purchase the Gleim CMA Review System (including books, Test Prep Software Download,
Audio Review, Gleim Online, Essay Wizards, Practice Exams, and access to a Personal
Counselor) to thoroughly prepare for the CMA exam. Commit to systematic preparation for
the exam as described in our review materials, including CMA Review: A System for
Success.
3. Communicate with your Personal Counselor to design a study plan that meets your needs.
Call (800) 874-5346 or email
4. Apply for membership in the IMA and the Certification Program.
5. Register online to take the desired part of the exam in the next available window.
6. Upon receipt of authorization to take the exam, schedule your test with Prometric.
7. Work systematically through each study unit in the Gleim CMA Review System.
8. Sit for and PASS the CMA exam while you are in control, as described in Study Unit 7 of
CMA Review: A System for Success. Gleim will make it easy.
9. Contact Gleim with your comments on our study materials and how well they prepared you
for the exam.
10. Enjoy your career, pursue multiple certifications (CIA, CPA, EA, etc.), recommend Gleim to
others who are also taking these exams, and stay up-to-date on your continuing
professional education with Gleim CPE.


Preparing for and Taking the CMA Exam

7

More specifically, you should focus on the following system for success on the CMA exam:

1.

2.

3.

4.

5.

Understand the exam, including its purpose, coverage, preparation, format,
administration, grading, and pass rates.
a. The better you understand the examination process from beginning to end, the better
you will perform.
b. Study the Gleim CMA Review: A System for Success. Please be sure you have a
copy of this useful booklet (also available online at www.gleim.com/sfs).
Learn and understand the subject matter tested. The ICMA’s CSOs for Part 2 are the
basis for the study outlines that are presented in each of the 10 study units that make up
this book.* You will also learn and understand the material tested on the CMA exam by
answering numerous multiple-choice and essay questions from previous CMA exams.
Practice answering past exam questions to perfect your question-answering
techniques. Answering past exam questions helps you understand the standards to which
you will be held. This motivates you to learn and understand while studying (rather than
reading) the outlines in each of the 10 study units.
a. Question-answering techniques are suggested for multiple-choice and essay
questions in Study Unit 4 and Study Unit 5, respectively, of CMA Review: A System
for Success.
b. Our CMA Test Prep Software contains thousands of additional multiple-choice
questions that are not offered in our books. Additionally, CMA Test Prep Software
has many useful features, including documentation of your performance and the

ability to simulate the CMA exam environment.
c. Our CMA Gleim Online is a powerful Internet-based program that allows CMA
candidates to learn ir| an interactive environment and provides feedback to
candidates to encourage learning. It includes multiple-choice and essay questions in
Prometric’s format. Each CMA Gleim Online candidate has access to a Personal
Counselor, who helps organize study plans that work with busy schedules.
d. Additionally, each candidate should utilize the Gleim CMA Essay Wizard online
courses for even more practice on essays in an exam-like environment. The Essay
Wizard courses provide 40 additional essays that can be answered and graded for an
accurate indication of how well-prepared you are for the CMA’s essays.
Plan and practice exam execution. Anticipate the exam environment and prepare yourself
with a plan: When to arrive? How to dress? What exam supplies to bring? How many
questions and what format? Order of answering questions? How much time to spend on
each question? See Study Unit 7 in CMA Review: A System for Success.
a. Expect the unexpected and adjust! Remember, your sole objective when taking an
examination is to maximize your score. You must outperform your peers, and being
as comfortable and relaxed as possible gives you an advantage!
Be in control. Develop confidence and ensure success with a controlled preparation
program followed by confident execution during the examination.

*Please fill out our online feedback form (www.gleim.com/feedbackCMA2) IMMEDIATELY after you take the
CMA exam so we can adapt to changes in the exam. Our approach has been approved by the ICMA.


8

Preparing for and Taking the CMA Exam

PRELIMINARY TESTING: GLEIM CMA DIAGNOSTIC QUIZZES
The five Gleim CMA Diagnostic Quizzes provide a representative sample of 40 multiple-choice

questions for each exam part to identify your preliminary strengths and any weaknesses before you
start preparing in earnest for the CMA exam. They also provide you with the actual exam experience,
i.e., what you will encounter when you take the CMA exam at Prometric.
When you have completed each quiz, one of our Personal Counselors will consult with you to
better focus your review on any areas in which you have less confidence. After your consultation, you
will be able to access a Review Session, where you can study answer explanations for the correct and
incorrect answer choices of the questions you answered incorrectly.
For smart phone users, there is also a Gleim Diagnostic Quiz App for iPhone, iPod Touch, and
Android. See our website (www.gleim.com/cmadiagnosticquiz) for more information.
HOW TO STUDY A STUDY UNIT USING THE GLEIM REVIEW SYSTEM
To ensure that you are using your time effectively, we recommend that you follow the steps listed
below when using all of the CMA Review System materials together (books, Test Prep Software, Audio
Review, Gleim Online, and Essay Wizard):
1.

(30 minutes, plus 10 minutes for review) In the CMA Gleim Online course, complete
Multiple-Choice Quiz #1 in 30 minutes. It is expected that your scores will be lower on the
first quiz.
a.

2.

3.
4.

5.

(30 minutes) Use the audiovisual presentation for an overview of the study unit. The Gleim
CMA Review Audios can be substituted for audiovisual presentations and can be used
while driving to work, exercising, etc.

(45 minutes) Complete the 30-question True/False quiz. It provides immediate feedback
and is most effective if used prior to studying the Knowledge Transfer Outline.
(60 minutes) Study the Knowledge Transfer Outline, particularly the troublesome areas
identified from the multiple-choice questions in the Gleim Online course. The Knowledge
Transfer Outlines can be studied either online or from the books.
(30 minutes, plus 10 minutes for review) Complete Multiple-Choice Quiz #2 in the Gleim
Online course.
a.

6.
7.

Immediately following the quiz, you will be prompted to review the questions you
marked and/or answered incorrectly. For each question, analyze and understand
why you were unsure or answered it incorrectly. This step is an essential learning
activity.

Immediately following the quiz, you will be prompted to review the questions you
marked and/or answered incorrectly. For each question, analyze and understand
why you were unsure or answered it incorrectly. This step is an essential learning
activity.

(60 minutes) Complete two 20-question quizzes while in Test Mode from the CMA Test Prep
Software. Review as needed.
(30 minutes) Complete and review the essay question in Gleim Online.


9

Preparing for and Taking the CMA Exam

When following these steps, you will complete all 10 units in about 50 hours. Then spend about
10-20 hours using the CMA Test Prep Software to create customized tests for the problem areas that
you identified. When you are ready, create 20-question quizzes that draw questions from all 10 study
units. Continue taking 20-question quizzes until you approach a 75%+ proficiency level.
The times mentioned above and on the previous page are recommendations based on prior
candidate feedback and how long you will have to answer questions on the actual exam. Each
candidate’s time spent in any area will vary depending on proficiency and familiarity with the subject
matter.
CMA GLEIM ONLINE
CMA Gleim Online is a versatile, interactive, self-study review program delivered via the Internet.
It is divided into two courses (one for each part of the CMA exam) and emulates the CMA exam.
Each course is broken down into 10 individual, manageable study units. Completion time per
study unit will be about 4 hours. Each study unit in the course contains an audiovisual presentation,
30 true/false study questions, 10-20 pages of Knowledge Transfer Outlines, two 20-question multiplechoice quizzes, and an essay question.
CMA Gleim Online provides you with a Personal Counselor, a real person who will provide support
to ensure your competitive edge. CMA Gleim Online is a great way to get confidence as you prepare
with Gleim. This confidence will continue during and after the exam.
GLEIM ESSAY WIZARD
The Gleim Essay Wizard is a training program that focuses on the essay questions that appear in
both parts of the CMA exam. This online course provides two essay questions per study unit, as well
as test-taking tips from Dr. Gleim to help you stay in control.

I was just informed J received The ICMA Bronze Medal for the JanuaryFebruary 2012 testing window. The Gleim materials were excellent. They
helped me pass by dedicating less than 100 hours of study which I think
is quite amazing. I will recommend Gleim to anyone who needs to study
for CMA!
• Saif Lalant, CMA

10

Preparing for and Taking the CMA Exam

GLEIM BOOKS
This edition of the CMA Part 2 Review book has the following features to make studying easier:
1.

Examples: Longer, illustrative examples, both hypothetical and those drawn from actual
events, are set off in shaded, bordered boxes.
EXAMPLE of Translation Gains and Losses

On December 15, Year 1, Boise Co. purchased electronic components from Kinugasa Corporation. Boise must pay
Kinugasa ¥15,000,000 on January 15, Year 2. The exchange rate in effect on December 15, Year 1, was $.01015 per yen,
giving the transaction a value on Boise’s books of $152,250 (¥15,000,000 * $.01015).
lr9E^,ctlQn„0ate:
Inventory
Accounts payable

$152,250
$152,250

The exchange rate on December 31, Year 1, Boise’s reporting date, has fallen to $.01010 per yen, The balance of the
payable must be adjusted (and a gain in OCI recognized) in the amount of $750 [(¥15,000,000 * ($.01015 - $.01010)].

R.egQrtjng,Date.;
Accounts payable
Foreign currency translation adjustment

$750

$750

The exchange rate on January 15, Year 2, has risen to $.01020 per yen. To settle the payable, the balance must be
adjusted (and a loss in OC! recognized) in the amount of $1,500 {¥15,000,000 * ($.01010 -$.01020)].
Settlement Date:
Accounts payable ($152,250 <•* $750)
Foreign currency translation adjustment
Cash

2.

$151,500
1,500
$153,000

Gleim Success Tips: These tips supplement the core exam material by suggesting how
certain topics might be presented on the exam or how you should prepare for an issue.
CMA candidates need to be prepared to answer ethical questions, which can be integrated with any topic
tested on Part 2: Financial Decision Making. Ethics may be tested in the multiple-choice section, the essay
section, or both. Like all other topics, Ethics is eligible to be tested at all three levels of difficulty, requiring
you to (1) recall aspects of the Foreign Corrupt Practices Act and IMA Statement of Management
Accounting and (2) evaluate and apply the different aspects as they relate to typical business situations.
It is also important to understand the differences between illegal and unethical behavior by an organization.

3.

Core Concepts: Core concepts are included at the end of each subunit. The core
concepts provide an overview of the key points of each subunit that serve as the foundation
for learning. As part of your review, you should make sure that you understand each of
them.

Preparing for and Taking the CMA Exam

11

CMA TEST PREP SOFTWARE
Twenty-question tests in the CMA Test Prep Software will help you to focus on your weaker
areas. Make it a game: How much can you improve?
Our CMA Test Prep (in test mode) forces you to commit to your answer choice before looking at
answer explanations; thus, you are preparing under true exam conditions. It also keeps track of your
time and performance history for each study unit, which is available in either a table or graphical
format.
STUDYING WITH BOOKS AND SOFTWARE
Simplify the exam preparation process by following our suggested steps listed below. DO NOT
omit the step in which you diagnose the reasons for answering questions incorrectly; i.e., learn from
your mistakes
while studying so you avoid making similar mistakes on the CMA exam.
1.

Intest mode, answer a 20-question diagnostic test from each study unit before studying any
other information.

2.

Study the Knowledge Transfer Outline for the corresponding study unit in your Gleim book.
a. Place special emphasis on the weaker areas that you identified with the initial
diagnostic test in Step 1.

3.

4.

5.
6.

Take two or three 20-question tests in test mode after you have studied the Knowledge
Transfer Outline.
Immediately following each practice test, you will be prompted to review the questions you
marked and/or answered incprrectly. For each question, analyze and understand why you
were unsure or answered it ihcorrectly. This step is an essential learning activity.
Continue this process until you approach a predetermined proficiency level, e.g., 75%+.
Modify this
process to suit your individual learning process.
a. Learning from questions you answer incorrectly is very important. Each question you
answer incorrectly should be viewed as an opportunity to avoid missing actual test
questions on your CMA exam. Thus, you should carefully study the answer
explanations provided until you understand why you chose the incorrect answer so
you can avoid similar errors on your exam. This study technique is clearly the
difference between passing and failing for many CMA candidates.
b. Also, you must determine why you answered questions incorrectly and learn how to
avoid the same error in the future. Reasons for missing questions include:
1)
2)
3)
4)
5)
6)
7)
8)
c.

d.

Misreading the requirement (stem)
Not understanding what is required
Making a math error
Applying the wrong rule or concept
Being distracted by one or more of the answers
Incorrectly eliminating answers from consideration
Not having any knowledge of the topic tested
Employing bad intuition when guessing

It is also important to verify that you answered correctly for the right reasons (i.e., read
the discussion provided for the correct answer). Otherwise, if the material is tested
on the CMA exam in a different manner, you may not answer it correctly.
It is imperative that you complete your predetermined number of study units per week
so you can review your progress and realize how attainable a comprehensive CMA
review program is when using Gleim CMA Review System. Remember to meet or
beat your schedule to give yourself confidence.


12

Preparing for and Taking the CMA Exam

GLEIM AUDIO REVIEWS
Gleim CMA Audio Reviews provide an average of 30 minutes of quality review for each study unit.
Each review provides an overview of the Knowledge Transfer Outline for each study unit in the CMA
Review book. The purpose is to get candidates “started” so they can relate to the questions they will
answer before reading the study outlines in each study unit.
The audios get to the point, as does the entire Gleim System for Success. We are working to get

you through the CMA exam with the minimum time, cost, and frustration. You can listen to two short
sample audio reviews on our website at www.gleim.com/accounting/demos/.
FINAL REVIEW: GLEIM CMA PRACTICE EXAM - available Summer 2012
Take a CMA Practice Exam (complimentary with your complete CMA Review System) shortly
before you take the actual exam to gain experience in the computer-based exam environment. The
Practice Exam is 4 hours (240 minutes) long and contains 100 multiple-choice and 2 essay questions,
just like the CMA exam. Therefore, it tests you not only on the content you have studied, but also on
the question-answering and time-management techniques you have learned.
For the most realistic practice exam experience, we suggest you complete the entire exam in one
sitting, just like the actual CMA exam. Once you have completed the Practice Exam and received your
grade, you will be provided with a Review Session that shows which questions were answered
incorrectly. Additionally, you will be able to study answer explanations and suggested essay responses
to assist you in learning the topics.
TIME-BUDGETING AND QUESTION-ANSWERING TECHNIQUES FOR THE EXAM
Expect 100 multiple-choice questions and 2 essay questions on each part with a 240-minute total
time allocation (180 minutes max for multiple-choice questions and at least 60 minutes for the essays).
See Study Units 4 and 5 in CMA Review: A System for Success for additional discussion of how to
maximize your score on multiple-choice questions and essays.
1.

Budget your time.

2.

a. We make this point with emphasis. Just as you would fill up your gas tank prior to
reaching empty, so too should you finish your exam before time expires.
b. You have 180 minutes to answer the 100 multiple-choice questions, i.e., 1.8 minutes
per question. We suggest you allocate 1.5 minutes per question. This would result in
completing 100 questions in 150 minutes to give you 30 minutes to review questions
that you have marked.

c. Before beginning the multiple-choice questions, prepare a Gleim Time Management
Sheet as recommended in Study Unit 7 of CMA Review: A System for Success.
Answer the questions in consecutive order.
a. Do not agonize over any one item. Stay within your time budget.
b. Mark any questions you are unsure of and return to them later as time allows.
c. Never leave a multiple-choice question unanswered. Make your best educated guess
in the time allowed. Remember that your score is based on the number of correct
responses. You will not be penalized for guessing incorrectly.


Preparing for and Taking the CMA Exam

3.

13

For each multiple-choice question,
a.

Try to ignore the answer choices. Do not allow the answer choices to affect your
reading of the question.
1)

b.

If four answer choices are presented, three of them are incorrect. These choices
are called distractors for good reason. Often, distractors are written to appear
correct at first glance until further analysis.
2) In computational items, the distractors are carefully calculated such that they are
the result of making common mistakes. Be careful, and double-check your

computations if time permits.
Read the question carefully to determine the precise requirement.
1) Focusing on what is required enables you to ignore extraneous information, to
focus on the relevant facts, and to proceed directly to determining the correct
answer.
a)

c.
d.

Be especially careful to note when the requirement is an exception; e.g.,
“All of the following statements regarding a company’s internal rate of
return are true except:”
Determine the correct answer before looking at the answer choices.
Read the answer choices carefully.

e.

1) Even if the first answer appears to be the correct choice, do not skip the
remaining answer choices. Questions often ask for the “best” of the choices
provided. Thus, each choice requires your consideration.
2) Treat each answer choice as a true/false question as you analyze it.
Click on the best answer.

f.

g.

1) You have a 25% chance of answering the question correctly by blindly
guessing.

/
2) For many multiple-choice questions, two answer choices can be eliminated with
minimal effort, thereby increasing an educated guess to a 50-50 proposition.
As you answer a question, you can mark it by pressing the “Mark” button or unmark a
marked question by pressing the “Marked” button. After you have answered, marked,
or looked at and not answered all 100 questions, you will be presented with a review
screen that shows how many questions you did not answer and how many you
marked. You then have the option of revisiting all of the unanswered questions and
“marked” questions.
1) Go back to the marked questions and finalize your answer choices.
2) Verify that all questions have been answered.
If you don’t know the answer:
1) Again, guess; but make it an educated guess, which means select the best
possible answer. First, rule out answers that you think are incorrect. Second,
speculate on what the ICMA is looking for and/or the rationale behind the
question. Third, select the best answer or guess between equally appealing
answers. Your first guess is usually the most intuitive. If you cannot make an
educated guess, read the stem and each answer and pick the best or most
intuitive answer. It’s just a guess!
2) Make sure you accomplish this step within your predetermined time budget per
testlet.


14

Preparing for and Taking the CMA Exam

ESSAY QUESTIONS
Each part of the CMA exam contains two essays. You have at least 1 hour to complete both.
If you finish your multiple-choice questions section in less than 3 hours, your remaining time will be

carried over to the essay section and added to the standard 1-hour allocation. Essay questions that
require a purely written answer will have a box in which to type your response. For certain problems
that require quantitative responses, you will be able to use a spreadsheet tool to present your
calculations. Complete instructions and the ICMA’s recommendations regarding the use of the
spreadsheet function can be found at www.prometric.com/ICMA/demo.htm.
The following example shows a typical essay question that does not require a quantitative answer.

Vorns. J»c 's psrssdk&t has pr*t*;s*d sale* <:f *■" V
'&&&d ot£
product for tfe* contef yes *vkfc m anticipated se&g price d%22
\mt
Yom e\f ects a befsuspj
gc:4s tntcr d *■■ C(* miis
a
cost vf S2.C >0 X ^ mS m
fvvd?
d '5! 7'.
The csMiipsir
a
mu ps&dsassi* smd
begmskig or esdkg imerior c-f m&esiis. £acfc urit d tiii&'hed, jrond: is
budgeted tc- sacv*
pcimd; ;t u&xmd a* an
rvst d >* Y. ptt
pitwid m wdl as *5 hours d ds-«ct hbor at expected con cl S* >.<3v per
hjd{pri*3taf.‘d !ptt (feecElafeci ksa
dier?
hear
For fixed overfsead. The ear^air ajj&eipatef viable

md aimus^aiR'?
cosfecf5l0vpfn«& $€ild ft&d
&vi
rosts d
$ r 500,000 Me? the preside discussed the sals: budget
ofon
manasw the budded
s &&as? tin ifc* comic; ;■
by
1,000,0)0 unk5 due the saiei u ^ u s^ 'b rjra>£ ypsacoe
*he cn$m&

&<&a

Pi sp&»

*h<>'7

I t Vw b

a. F r o - ^ c fe &sd|jfit m .

c Ct>r>d goods icid

i

year.

[4]

/•

budgetwasv

i|ll!l!!!!l!!il

[3]

1.
2.

3.
4.
5.
6.

Question Number: The question number indicates which question the candidate is
answering out of the total questions in both scenarios.
Time Remaining: This information box displays to the candidate how long (s)he has
remaining to complete and review the essays. Consistently check the amount of time
remaining in order to stay on schedule.
Scenario: This section displays the content of the current essay’s scenario.
Question: This section displays the content of the current question the candidate is
answering.
Answer Box: This area is where the candidate types in his/her response to the current
question.
Word Processing Tools: These icons, when selected, enable the candidate to cut, copy,
paste, and save the content of his/her response (much like a standard word processing
program).

15

Preparing for and Taking the CMA Exam

7.

Calculator: The calculator provided is a basic tool for simple computations. It is similar to
calculators used in common software programs.
8. Time Value Tables: This function allows the examinee to access Present/Future Time Value
Tables as needed.
9. Previous: This navigation button allows the candidate to move back to the previous
question.
10. Next: This navigation button allows the candidate to move ahead to the next question.
11. Mark: This button allows the candidate to mark a question for later review.
12. Review: Clicking this button takes the candidate to the Review screen, which contains a
scrollable listing of all the question numbers and indicates if the question has been marked
for review, completed, or skipped.
The following example shows a typical essay question that requires a quantitative answer. Note
that many of the buttons and functions are the same as in the non-quantitative questions; these have
not been explained again below.
r

Romano Foods Inc. manufactures Roman Surprise f m im P iiz b $ that are 12 inches m diameter and reta^ for
14,89 to 16 9 1 depending upon the topping The company employs a process coslmg system in Ahtch the product
flows through several processes Joe Corolla
^asident of production. has had a long-running disagreement
with the controller, Sue Marshall
the handling of spoilage costs Corolla resists every attempt to charge
production with variance rasponsib&ties un*ess they am favorable Spoilage costs ha\e not been significant in the

past but in November the
Department had a large amount of ^poiia^e Traditionary Romano roods has
treated 10% of good output as norma? spoilage The department m^ut 120 000 units of ingredients m d *3 COO
dough units were rejected s*
Marsha^ is concerned about
a tn oi^a ! ~-pc%e and vvarits GcrcJa is
take corrective steps Corolla on the other hand maintssps that the U king Department is operating pioperiy. Hi’
has prepared the following report to support hh contentrorL
_
Romano Foods - Mixing Department

1.

2.
3.

*■

x

[ 1]

*■

CMA Spreadsheet: This is the area where the candidate types in his/her response to a
question that requires computations. Remember that the CMA spreadsheet is NOT Excel.
Therefore, even candidates who are extremely proficient in Excel need to practice with the
CMA spreadsheets.
Spreadsheet Instructions: The spreadsheet instructions detail the different functions and
tools available in the CMA spreadsheet.

Scenario: Clicking this button opens a pop-up window (see [3a]) that shows the content of
the current essay’s scenario.


16

Preparing for and Taking the CMA Exam

ESSAY GRADING
The written-response questions will not be graded online, and therefore, you will not immediately
receive your grade. The questions will be graded by subject matter experts, and partial credit will be
given. For example, if you are asked to give three reasons why a selected alternative action is good for
a business and you provide only two correct reasons, you will receive partial credit for these two
responses. Likewise, for questions requiring a calculated response, partial credit will be given for a
correct formula even though a mathematical error may have been made in the final number.
The ICMA grades candidates on both subject matter and writing skills on the essay portion of the
CMA exam. For writing skills to be graded, the response must be relevant to the question asked. The
specific criteria for the ICMA’s grading are as follows:
Use of standard English —includes proper grammar, punctuation, and spelling.
Organization - response is arranged logically and coherently.
Clarity - analysis is clearly communicated with well-constructed sentences and appropriate
vocabulary.
HOW TO BE IN CONTROL WHILE TAKING THE EXAM
You have to be in control to be successful during exam preparation and execution. Control can
also contribute greatly to your personal and other professional goals. Control is a process whereby you
1.
2.
3.
4.
5.

6.
7.

Develop expectations, standards, budgets, and plans
Undertake activity, production, study, and learning
Measure the activity, production, output, and knowledge
Compare actual activity with expected and budgeted activity
Modify the activity, behavior, or study to better achieve the desired outcome
Revise expectations and standards in light of actual experience
Continue the process or restart the process in the future

Exercising control will ultimately develop the confidence you need to outperform most other CMA
candidates and PASS the CMA exam! Obtain our CMA Review: A System for Success booklet for a
more detailed discussion of control and other exam tactics.
IF YOU HAVE QUESTIONS ABOUT GLEIM MATERIALS
Content-specific questions about our materials will be answered most rapidly if they are sent to us
via email to Our team of accounting experts will give your correspondence
thorough consideration and a prompt response.
Questions regarding the information in this Introduction (study suggestions, studying plans, exam
specifics) should be emailed to
Questions concerning orders, prices, shipments, or payments should be sent via email to
and will be promptly handled by our competent and courteous customer
service staff.
For technical support, you may use our automated technical support service at
www.gleim.com/support, email us at , or call us at (800) 874-5346.


STUDY UNIT ONE
ETHICS FOR THE ORGANIZATION
AND BASIC FINANCIAL STATEMENTS

(27 pages of outline)

1.1
1.2
1.3
1.4
15
1.6
1.7
1.8
1.9
1.10

Corporate Ethics and Legislation
................ , .................................................. ......
Corporate Responsibility for Ethical Behavior .................................................................... 21
Basic Financial Statements and Their Users
, ....................................................... ..
26
Statement of Financial Position (Balance Sheet)................................................................ 28
Statement of Income and Statement of Retained Earnings ................................................ 32
Statement of Cash Flows - Contents ......... . ......... ......................... .............. . . . . . . . . . 37
Statement of Cash Flows - Calculations — .................................................................. 39
Common-Size Financial Statements .................. .............................................................. 39
Core Concepts ........................................ ...................... ........... ..................................... 41
Essay Questions . — ............ ............... ............. . — ................................................ 57

Organizational Ethics
Ethical issues and considerations are tested in both parts of the CMA exam. In Part 1, ethics is
tested from the perspective of the individual, and in Part 2, it is tested from the perspective of the

organization. Ethics may be tested in conjunction with any topic area.
Financial Statement Analysis
Management accountants deal with; aspects of external financial reporting and thus need to be
able to prepare and understand the principal financial statements of a business and to know the
limitations of financial statement information. Areas tested on the CMA exam include asset and
liability recognition and measurement, equity recognition and measurement, revenue, expenses,
extraordinary items, and earnings per share. Knowledge of the SEC and its reporting requirements
is also tested, as are annual report contents.
This study unit is the first of three on financial statement analysis. The relative weight assigned
to this major topic in Part 2 of the exam is 25%. The three study units are
Study Unit 1: Ethics for the Organization and Basic Financial Statements
Study Unit 2: Ratio Analysis
Study Unit 3: Profitability Analysis and Analytical Issues
A portion of this study unit is on professional ethics. The relative weight assigned to this major
topic in Part 2 of the exam is 5%.

19