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Here are sample IMANET Certified Management Accountant (CMA) Exam questions from real exam. You can get more IMANET CMA (CMA) Exam premium practice questions at TestInsights.
Question 1
On January 1. Crane Company will acquire a new asset that costs $400,000 and is anticipated to have a salvage value of $30,000 at the end of 4 years. The new asset
* Qualifies as 3-year property under the Modified Accelerated Cost Recovery System (MACRS).
* Will replace an old asset that currently has a tax basis of $80,000 and can be sold now for $60,000.
* Will continue to generate the same operating revenues as the old asset ($200 .000 per year). However, savings in operating costs will be experienced as follows: a total of $ 120.000 in each of the first 3 years and $90,000 in the fourth year. Crane is subject to a 40% tax rate and rounds all computations to the nearest dollar. Assume that any gain or loss affects the taxes paid at the end of the year in which it occurred. The company uses the net present value method to analyze projects using the following factors and rates:
The present value of the depreciation tax shield for the fourth year MACRS depreciation of Crane Company's new asset is?
Correct : C
The firm will be able to deduct 7% of the asset's cost during the fourth year of the asset's life. The deduction is $28,000 ($400,000 x 7%), and the tax savings is $11,200 ($28,000 x 40%). The present value of this amount is $6,608 ($11,200 x .59 PV of $1 at 14% for four periods).
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Question 2
On January 1, Crane Company will acquire a new asset that costs $400,000 and is anticipated to have a salvage value of $30,000 at the end 014 years. The new asset
* Qualifies as 3-year property under the Modified Accelerated Cost Recovery System (MACRS).
* Will replace an old asset that currently has a tax basis of $80,000 and can be sold now for $60,000.
* Will continue to generate the same operating revenues as the old asset ($200,000 per year). However, savings in operating costs will be experienced as follows: a total of $1 20.000 in each of the first 3 years and $90,000 in the fourth year. Crane is subject to a 40% tax rate and rounds all computations to the nearest dollar. Assume that any gain or loss affects the taxes paid at the end of the year in which it occurred. The company uses the net present value method to analyze projects using the following factors and rates:
The discounted net-of-tax amount that should be factored into Crane Company's analysis for the disposal transaction is?
Correct : C
The old asset can be sold for $60,000, producing an immediate cash inflow of that amount. This sale will result in a $20,000 loss for tax purposes ($80,000 --- $60,000). At a 40% tax rate, the loss, which is deemed to affect taxes paid at the end of the first year, will provide a tax savings (cash inflow) of $8,000. Because the $8,000 savings is treated as occurring at the end of the first year, it must be discounted. This discounted (present) value is $7,040 ($8,000 x .88 PV of $1 at 14% for one period). Combining the $60,000 initial inflow with the $7,040 of tax savings results in a net-of-tax amount of $67,040.
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Question 3
The accounting rate of return?
Correct : B
The accounting rate of return (also called the unadjusted rate of return or book value rate of return) is calculated by dividing the increase in accounting net income by the required investment. Sometimes the denominator is the average investment rather than the initial irstment This method ignores the time value of money hand focuses on income as opposed to cash flows.
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Question 4
What is a challenge that the long-term aspect of capital budgeting presents to the management accountant?
Correct : B
Capital budgeting is the process of planning and controlling investments for long-tern, projects It is this long-term aspect of capital budgeting that presents the management accountant with specific challenges. Most financial and management accounting topics concern tracking and reporting activity for a single accounting or reporting cycle, such as one month or one year, By their nature, capital projects affect multiple accounting periods and will constrain the organization's financial planning well into the future. Once made, capital budgeting deacons tend to be relatively inflexible.
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Question 5
Union Electric Company must clean up the water released from its generating plant. The company's cost of capital is 12 percent for average risk projects, and that rate is normally adjusted up or down by 2 percentage points for high- and low- risk projects. Clean-Up Plan A . which is of average risk, has an initial cost of $10 million, and its operating cost will be $1 million per year for its 10-year life. Plan B, which is a high-risk project, has an initial cost of $5 million, and its annual operating cost over Years 1 to 10 will be $2 million. What is the approximate PV of costs for the better project?
Correct : B
The cash flows of Plan A are discounted at 12%, the company's cost of capital for average risk projects. Plan B is evaluated with a lower cost of capital that reflects a greater risk of the cash outflow of the project. Thus, the cash flows of Plan B are discounted at 10% (12% --- 2%). the company's adjusted cost of capital for high risk projects. The net present value of each plan is the initial cost plus the present value of an annuity for 10 years at the appropriate rate multiplied times the annual operating cost.
The present value factors are found in the tools section of CMA Test Prep.
Plan A NPV = $10,000,000 + ($1,000,000 x 5.650)
Plan A NPV = $15,650,000
Plan B NPV = $5,000,000 + ($2,000,000 x 6.145)
Plan B NPV = $17,290,000
Plan A has a lower NPV and thus is the better project.
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