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CMA Part 2 study materials
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CMA Part 2 practice questions

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Question 1Financial Statement Analysis

A company reported sales of $480,000 in Year 1 and $552,000 in Year 2. In a horizontal analysis, what is the percentage change in sales from Year 1 to Year 2?

  1. 13.0%
  2. 15.0% Correct answer.
  3. 72.0%
  4. 10.4%

Explanation

Horizontal analysis measures the change in a line item between periods as (current year amount − base year amount) ÷ base year amount. Here ($552,000 − $480,000) ÷ $480,000 = $72,000 ÷ $480,000 = 15.0%.

Question 2Financial Statement Analysis

In a common-size income statement, a company with sales of $800,000 and cost of goods sold of $520,000 reports cost of goods sold as:

  1. 61.5%
  2. 65.0% Correct answer.
  3. 53.8%
  4. 35.0%

Explanation

Vertical (common-size) analysis expresses each income statement line as a percentage of net sales. Cost of goods sold of $520,000 divided by sales of $800,000 equals 65.0%.

Question 3Financial Statement Analysis

A company reports cash and equivalents of $60,000, accounts receivable of $120,000, inventory of $120,000, and current liabilities of $150,000. Its quick (acid-test) ratio is:

  1. 2.00
  2. 1.20 Correct answer.
  3. 1.50
  4. 0.80

Explanation

The quick ratio excludes inventory and is computed as (cash + marketable securities + receivables) ÷ current liabilities. ($60,000 + $120,000) ÷ $150,000 = 1.20.

Question 4Financial Statement Analysis

A company reports cost of goods sold of $600,000 and average inventory of $100,000. Its inventory turnover is:

  1. 4.0 times
  2. 8.0 times
  3. 6.0 times Correct answer.
  4. 5.0 times

Explanation

Inventory turnover measures how many times inventory is sold and replaced during the period: cost of goods sold ÷ average inventory = $600,000 ÷ $100,000 = 6.0 times.

Question 5Financial Statement Analysis

Total liabilities are $450,000 and total assets are $750,000. The debt-to-equity ratio is:

  1. 2.50
  2. 1.50 Correct answer.
  3. 0.67
  4. 0.60

Explanation

Debt-to-equity equals total liabilities divided by total equity. Equity is $750,000 − $450,000 = $300,000, so the ratio is $450,000 ÷ $300,000 = 1.50.

Question 6Financial Statement Analysis

A company has net credit sales of $1,200,000 and average accounts receivable of $150,000. Using a 365-day year, its days sales outstanding is approximately:

  1. 22.8 days
  2. 30.4 days
  3. 45.6 days Correct answer.
  4. 60.8 days

Explanation

Receivables turnover equals net credit sales ÷ average receivables = $1,200,000 ÷ $150,000 = 8.0 times, and days sales outstanding equals 365 ÷ 8.0 = 45.6 days.

Question 7Financial Statement Analysis

Which of the following most likely indicates lower earnings quality?

  1. A decline in days sales outstanding
  2. A one-time gain on disposal of a business segment Correct answer.
  3. Sales growth matched by growth in operating cash flow
  4. A gross margin increase caused by lower input prices

Explanation

Earnings quality is higher when income arises from recurring core operations and is supported by cash flow. A gain from disposing of a segment will not recur, so income dominated by that gain does not signal sustainable earning power.

Question 8Financial Statement Analysis

Current assets are $240,000 and current liabilities are $180,000. Working capital is:

  1. $240,000
  2. $420,000
  3. $180,000
  4. $60,000 Correct answer.

Explanation

Working capital is the excess of current assets over current liabilities: $240,000 − $180,000 = $60,000. It measures the short-term liquidity cushion available to the firm.

Question 9Financial Statement Analysis

A company has a net profit margin of 6%, a total asset turnover of 1.5, and an equity multiplier of 2.0. Its return on equity is:

  1. 12.0%
  2. 18.0% Correct answer.
  3. 24.0%
  4. 9.0%

Explanation

Under the DuPont framework, ROE = net profit margin × total asset turnover × equity multiplier. Here 6% × 1.5 × 2.0 = 18.0%.

Question 10Financial Statement Analysis

A company has days inventory outstanding of 60, days sales outstanding of 45, and days payables outstanding of 30. Its cash conversion cycle is:

  1. 45 days
  2. 135 days
  3. 105 days
  4. 75 days Correct answer.

Explanation

The cash conversion cycle is the days a dollar is tied up in operations: days inventory outstanding + days sales outstanding − days payables outstanding = 60 + 45 − 30 = 75 days.

Question 11Financial Statement Analysis

A company reports EBIT of $480,000 and interest expense of $160,000. Its times interest earned ratio is:

  1. 0.33
  2. 2.00
  3. 4.00
  4. 3.00 Correct answer.

Explanation

Times interest earned equals earnings before interest and taxes divided by interest expense: $480,000 ÷ $160,000 = 3.00. It indicates how many times operating earnings cover the interest obligation.

Question 12Financial Statement Analysis

Sales are $1,000,000, variable costs are $600,000, and fixed costs are $300,000. If sales increase by 10%, operating income will increase by approximately:

  1. 4%
  2. 40% Correct answer.
  3. 10%
  4. 25%

Explanation

Degree of operating leverage equals contribution margin divided by operating income: $400,000 ÷ $100,000 = 4.0. A 10% increase in sales therefore raises operating income by about 4.0 × 10% = 40%.

Question 13Financial Statement Analysis

Operating cash flow is $500,000, capital expenditures are $180,000, and dividends paid are $60,000. Free cash flow is:

  1. $500,000
  2. $320,000 Correct answer.
  3. $260,000
  4. $440,000

Explanation

Free cash flow equals operating cash flow less capital expenditures: $500,000 − $180,000 = $320,000. Dividends are a financing outflow and are not deducted in this measure.

Question 14Financial Statement Analysis

During a period of rising prices, a company using LIFO sells down inventory below normal levels (a LIFO liquidation). Compared with normal operations, reported gross profit will most likely:

  1. Increase, because old low-cost layers are matched against current revenue Correct answer.
  2. Decrease, because the older cost layers carry lower unit costs than current purchases
  3. Fall to zero, because all remaining inventory layers are eliminated
  4. No change, because the physical quantity of units sold is unchanged

Explanation

A LIFO liquidation matches older, lower-priced inventory layers against current selling prices, which temporarily inflates gross profit and net income. The benefit is not sustainable because the liquidated layers must eventually be rebuilt at higher current costs.

Question 15Financial Statement Analysis

During a period of rising prices and stable inventory quantities, a company using FIFO instead of LIFO will report:

  1. lower inventory and a lower current ratio
  2. higher cost of goods sold and lower net income
  3. higher inventory and a higher current ratio Correct answer.
  4. identical inventory and a higher gross margin

Explanation

With rising prices, FIFO leaves the newer, more costly units in ending inventory, so inventory and therefore current assets are higher than under LIFO. Cost of goods sold is lower, which produces higher gross profit and a higher current ratio.

Question 16Financial Statement Analysis

Net income is $900,000, preferred dividends are $100,000, and weighted-average common shares outstanding are 400,000. Basic earnings per share is:

  1. $1.80
  2. $2.25
  3. $2.50
  4. $2.00 Correct answer.

Explanation

Basic EPS equals income available to common shareholders divided by weighted-average common shares: ($900,000 − $100,000) ÷ 400,000 = $2.00. Preferred dividends are deducted because they are not available to common shareholders.

Question 17Financial Statement Analysis

A company has a return on equity of 15% and pays out 40% of its earnings as dividends. Its sustainable growth rate is:

  1. 9.0% Correct answer.
  2. 6.0%
  3. 12.5%
  4. 15.0%

Explanation

The sustainable growth rate equals ROE multiplied by the retention (plowback) ratio: 15% × (1 − 0.40) = 9.0%. It estimates how fast sales can grow using internally generated equity without changing financial leverage.

Question 18Financial Statement Analysis

Which of the following is most likely to cause a company's reported debt-to-assets ratio to understate its actual financial leverage?

  1. Issuing bonds and using the proceeds to repurchase shares of common stock
  2. Refinancing short-term debt with long-term debt of the same amount
  3. Recording a valuation allowance against the deferred tax asset balance
  4. Using lease arrangements whose obligations are not recognized as liabilities Correct answer.

Explanation

Financing obligations that are not recognized as liabilities leave both debt and the related assets off the balance sheet, so reported leverage looks lower than the firm's true fixed commitments. Analysts adjust for such obligations when assessing solvency.

Question 19Financial Statement Analysis

Which of the following is reported in other comprehensive income rather than in net income?

  1. Cost of goods sold recognized for the period under the FIFO method
  2. A realized gain on the sale of manufacturing equipment used in operations
  3. An unrealized gain on debt securities classified as available for sale Correct answer.
  4. Interest expense accrued on long-term bonds payable during the period

Explanation

Other comprehensive income captures items that bypass net income, including unrealized holding gains and losses on available-for-sale debt securities, foreign currency translation adjustments, and certain pension adjustments. These amounts accumulate in accumulated other comprehensive income within equity.

Question 20Financial Statement Analysis

A company capitalizes costs that should have been expensed. In the year the costs are incurred, this error will:

  1. understate net income and total assets
  2. overstate net income and understate total assets
  3. have no effect on net income but will overstate total assets
  4. overstate net income and total assets Correct answer.

Explanation

Capitalizing a cost defers recognition to future periods, so current-period expense is too low and the asset balance is too high. Both net income and total assets are therefore overstated in the year of the error, and the effect reverses through future depreciation or amortization.

Question 21Financial Statement Analysis

A company reports a return on equity of 20%, an equity multiplier of 2.5, and a net profit margin of 4%. Its total asset turnover is:

  1. 0.50
  2. 2.00 Correct answer.
  3. 0.08
  4. 5.00

Explanation

Rearranging the DuPont relationship, ROE = margin × turnover × equity multiplier, so turnover = ROE ÷ (margin × multiplier) = 20% ÷ (4% × 2.5) = 20% ÷ 10% = 2.00.

Question 22Financial Statement Analysis

Over three years a company's net income has grown steadily, but operating cash flow has declined, days sales outstanding have lengthened, and days inventory outstanding have increased. The most likely explanation is that:

  1. the company has tightened credit policy and improved inventory turnover
  2. earnings growth is driven by accruals not yet converted into cash Correct answer.
  3. the company has reduced its reliance on short-term borrowing
  4. the cash conversion cycle has shortened considerably

Explanation

Divergence between rising accrual earnings and falling operating cash flow, combined with slower receivable and inventory turnover, indicates that revenue and profit are being recognized ahead of collection. Working capital is absorbing cash, which is a classic warning sign about the quality and sustainability of reported earnings.

Question 23Financial Statement Analysis

A company reports net income of $1,000,000 and 500,000 weighted-average common shares. It also has 1,000 convertible bonds with $1,000 face value, a 6% coupon, and a conversion ratio of 40 common shares per bond; the tax rate is 30%. Diluted earnings per share is:

  1. $1.85
  2. $1.93 Correct answer.
  3. $2.00
  4. $1.96

Explanation

For convertible bonds, diluted EPS adds back after-tax interest and adds the shares issuable on conversion: ($1,000,000 + $42,000) ÷ (500,000 + 40,000) = $1.93. The incremental effect of $42,000 ÷ 40,000 = $1.05 per share is below basic EPS of $2.00, so the bonds are dilutive.

Question 24Financial Statement Analysis

A company's current ratio rises from 1.8 to 2.2 while its quick ratio falls from 1.1 to 0.9. Which of the following best explains this pattern?

  1. An increase in accounts receivable with no change in current liabilities
  2. Collection of accounts receivable in cash
  3. Payment of accounts payable using cash
  4. A buildup of inventory financed by short-term borrowing Correct answer.

Explanation

Inventory counts as a current asset but is excluded from quick assets, so shifting liquidity into inventory raises the current ratio while lowering the quick ratio. Financing the buildup with short-term debt adds equally to current assets and current liabilities, which increases a current ratio that is already above 1.0.

Question 25Financial Statement Analysis

A company has total assets of $1,000,000, total liabilities of $400,000, and equity of $600,000. It records a $150,000 goodwill impairment with no tax effect. Immediately after the write-down:

  1. total assets are $850,000 and the debt-to-equity ratio is unchanged
  2. total assets remain $1,000,000 because the charge is recorded directly in equity
  3. equity is $450,000 and the debt-to-equity ratio is lower than before
  4. total assets are $850,000 and the debt-to-equity ratio is higher than before Correct answer.

Explanation

An impairment reduces the carrying amount of goodwill and also reduces equity by the same amount, so assets fall to $850,000 and equity to $450,000 while liabilities remain $400,000. Debt-to-equity rises from 0.67 ($400,000 ÷ $600,000) to 0.89 ($400,000 ÷ $450,000).

Question 26Financial Statement Analysis

A company reports net sales of $800,000 and cost of goods sold of $520,000. On a common-size income statement, cost of goods sold would be shown as:

  1. 65.0% Correct answer.
  2. 46.2%
  3. 35.0%
  4. 61.5%

Explanation

Common-size (vertical) analysis restates each income statement line as a percentage of net sales. Cost of goods sold of $520,000 divided by net sales of $800,000 equals 65.0%.

Question 27Financial Statement Analysis

A company reported sales of $480,000 in Year 1 and $540,000 in Year 2. In a horizontal analysis using Year 1 as the base year, Year 2 sales would be expressed as a trend index of:

  1. 112.5 Correct answer.
  2. 125.0
  3. 88.9
  4. 12.5

Explanation

Horizontal (trend) analysis divides the later-period amount by the base-period amount and multiplies by 100. Here $540,000 ÷ $480,000 = 112.5, meaning Year 2 sales are 112.5% of the base year.

Question 28Financial Statement Analysis

A company's common stock trades at $36 per share and its earnings per share are $2.40. Its price-to-earnings ratio is:

  1. 21.6
  2. 0.07
  3. 15.0 Correct answer.
  4. 6.7

Explanation

The price-to-earnings ratio equals market price per share divided by earnings per share. Dividing $36.00 by $2.40 gives a P/E of 15.0.

Question 29Financial Statement Analysis

A company has total stockholders' equity of $4,800,000, which includes $300,000 of preferred equity. It has 450,000 common shares outstanding. Book value per common share is:

  1. $9.60
  2. $10.67
  3. $8.00
  4. $10.00 Correct answer.

Explanation

Book value per common share equals common equity divided by common shares outstanding. Common equity is $4,800,000 minus $300,000 of preferred equity, or $4,500,000, divided by 450,000 shares, giving $10.00.

Question 30Financial Statement Analysis

A company reports cost of goods sold of $840,000 and average inventory of $140,000. Inventory turnover and days inventory outstanding (using a 365-day year) are closest to:

  1. 6.0 times and 61 days Correct answer.
  2. 7.0 times and 52 days
  3. 4.2 times and 87 days
  4. 6.0 times and 45 days

Explanation

Inventory turnover equals cost of goods sold divided by average inventory, or $840,000 ÷ $140,000 = 6.0 times. Days inventory outstanding equals 365 divided by turnover, or about 61 days.

Question 31Financial Statement Analysis

A company reports cash of $90,000, marketable securities of $30,000, accounts receivable of $150,000, inventory of $180,000, and current liabilities of $240,000. Its cash ratio is:

  1. 1.88
  2. 1.13
  3. 0.50 Correct answer.
  4. 0.13

Explanation

The cash ratio includes only the most liquid current assets: cash plus marketable securities divided by current liabilities. That is $120,000 ÷ $240,000 = 0.50.

Question 32Financial Statement Analysis

A company has sales of $1,000,000, variable costs of $400,000, and fixed costs of $360,000. Its degree of operating leverage is:

  1. 2.78
  2. 1.11
  3. 1.67
  4. 2.50 Correct answer.

Explanation

The degree of operating leverage equals contribution margin divided by operating income. Contribution margin is $600,000 and operating income is $240,000, so the ratio is 2.50.

Question 33Financial Statement Analysis

A company reports net sales of $3,600,000, average net fixed assets of $900,000, and average total assets of $1,800,000. Its fixed asset turnover is:

  1. 0.25 times
  2. 2.0 times
  3. 3.0 times
  4. 4.0 times Correct answer.

Explanation

Fixed asset turnover measures sales generated per dollar of net fixed assets: $3,600,000 ÷ $900,000 = 4.0 times. It isolates long-lived asset utilization rather than total asset utilization.

Question 34Financial Statement Analysis

A company reports after-tax operating income of $480,000, interest-bearing debt of $1,200,000, and equity of $2,000,000. Its return on invested capital is closest to:

  1. 24.0%
  2. 40.0%
  3. 16.0%
  4. 15.0% Correct answer.

Explanation

Return on invested capital equals after-tax operating income divided by the sum of interest-bearing debt and equity. That is $480,000 ÷ $3,200,000 = 15.0%.

Question 35Financial Statement Analysis

Under U.S. GAAP, cash interest paid on debt is classified in the statement of cash flows as:

  1. a financing outflow
  2. an operating outflow Correct answer.
  3. an investing outflow
  4. a noncash disclosure only

Explanation

U.S. GAAP treats interest paid as an operating cash outflow because it enters the determination of net income. IFRS is more flexible, allowing interest paid to be classified as operating or financing.

Question 36Financial Statement Analysis

A company's equity multiplier (average total assets divided by average total equity) is 2.4. Its total liabilities-to-total-assets ratio is closest to:

  1. 240.0%
  2. 140.0%
  3. 58.3% Correct answer.
  4. 41.7%

Explanation

The equity multiplier equals 1 divided by the equity-to-assets ratio, so equity is 1 ÷ 2.4, or 41.7% of assets. Liabilities therefore equal 100% minus 41.7%, or 58.3% of assets.

Question 37Financial Statement Analysis

A company reports cost of goods sold of $900,000 and average accounts payable of $75,000. Its accounts payable turnover is:

  1. 9.0 times
  2. 1.2 times
  3. 0.08 times
  4. 12.0 times Correct answer.

Explanation

Accounts payable turnover equals cost of goods sold (used as a proxy for purchases) divided by average accounts payable. That is $900,000 ÷ $75,000 = 12.0 times, implying payables are settled about monthly.

Question 38Financial Statement Analysis

A company reports a tax burden (net income divided by pretax income) of 0.75, an interest burden (pretax income divided by EBIT) of 0.80, an EBIT margin of 12%, an asset turnover of 1.5, and an equity multiplier of 2.0. Its return on equity is closest to:

  1. 21.6% Correct answer.
  2. 28.8%
  3. 9.0%
  4. 14.4%

Explanation

The five-step DuPont model multiplies tax burden, interest burden, EBIT margin, asset turnover, and equity multiplier: 0.75 × 0.80 × 0.12 × 1.5 × 2.0 = 0.216, or 21.6%.

Question 39Financial Statement Analysis

In Year 3 a company discovers that inventory was materially overstated at the end of Year 2, which overstated Year 2 net income. In preparing Year 3 comparative statements, the company should:

  1. report the correction as a cumulative effect within Year 3 income
  2. leave Year 2 as reported and disclose the error only in the notes
  3. treat the correction as a change in accounting estimate in Year 3
  4. restate Year 2 and adjust opening retained earnings Correct answer.

Explanation

A material error is corrected as a prior-period adjustment: previously issued comparative statements are restated and the opening balance of retained earnings is adjusted. The correction is excluded from current-period income so that no gain or loss is created by the fix.

Question 40Financial Statement Analysis

A company writes inventory down to net realizable value at year-end and records the loss within cost of goods sold. All else equal, the write-down will:

  1. increase the current ratio and increase inventory turnover
  2. decrease the current ratio and increase inventory turnover Correct answer.
  3. leave the current ratio and inventory turnover unchanged
  4. decrease the current ratio and decrease inventory turnover

Explanation

The write-down reduces ending inventory, a current asset, so the current ratio falls. Because the lower ending inventory also reduces average inventory while raising cost of goods sold, inventory turnover rises.

Question 41Corporate Finance

A firm maintains a target capital structure of 40% debt and 60% equity. Its pre-tax cost of debt is 10%, the marginal tax rate is 40%, and its cost of equity is 12%. What is the firm's weighted average cost of capital?

  1. 9.6% Correct answer.
  2. 8.4%
  3. 12.0%
  4. 10.2%

Explanation

WACC weights the after-tax cost of each source by its target proportion. After-tax cost of debt is 10% × (1 − 0.40) = 6%, so WACC = (0.40 × 6%) + (0.60 × 12%) = 2.4% + 7.2% = 9.6%.

Question 42Corporate Finance

The risk-free rate is 4%, the expected return on the market portfolio is 10%, and a firm's beta is 1.5. Using the capital asset pricing model, what is the firm's cost of equity?

  1. 13.0% Correct answer.
  2. 10.0%
  3. 15.0%
  4. 19.0%

Explanation

CAPM states that the cost of equity equals the risk-free rate plus beta times the market risk premium. The market risk premium is 10% − 4% = 6%, so the cost of equity is 4% + (1.5 × 6%) = 13%.

Question 43Corporate Finance

A project requires an initial outlay of $100,000 and is expected to generate $25,000 of cash inflow at the end of each year for six years. What is the project's payback period?

  1. 4.0 years Correct answer.
  2. 3.0 years
  3. 5.0 years
  4. 2.5 years

Explanation

The payback period is the time needed for cumulative cash inflows to equal the initial investment. With level annual inflows, $100,000 ÷ $25,000 = 4.0 years.

Question 44Corporate Finance

In the economic order quantity model, which cost rises as the size of each inventory order increases?

  1. Stockout cost
  2. Ordering cost
  3. Carrying cost Correct answer.
  4. Purchase cost per unit

Explanation

Carrying costs, such as storage, insurance, obsolescence and the opportunity cost of funds tied up in inventory, vary directly with the average quantity held. Ordering costs move in the opposite direction because larger orders mean fewer orders per year.

Question 45Corporate Finance

On which date does a declared cash dividend become a legal liability of the corporation?

  1. Ex-dividend date
  2. Payment date
  3. Holder-of-record date
  4. Declaration date Correct answer.

Explanation

The board's declaration creates the obligation, and the dividend becomes a recorded liability on that date. The record and payment dates merely determine who receives the cash and when it is disbursed.

Question 46Corporate Finance

Which measure is defined as current assets minus current liabilities?

  1. Gross working capital
  2. Operating cycle
  3. Net working capital Correct answer.
  4. Permanent working capital

Explanation

Net working capital is the excess of current assets over current liabilities and measures short-term liquidity. Gross working capital refers only to total current assets.

Question 47Corporate Finance

A project's cash flows produce a positive net present value when discounted at the firm's 10% cost of capital. The project's internal rate of return must therefore be:

  1. equal to 10%
  2. greater than 10% Correct answer.
  3. less than 10%
  4. negative

Explanation

NPV and IRR are linked: NPV is positive only when the discount rate used is below the IRR. Since the project is profitable at 10%, its IRR must exceed 10%.

Question 48Corporate Finance

A firm reports EBIT of $500,000 and annual interest expense of $100,000. What is its degree of financial leverage?

  1. 1.20
  2. 4.00
  3. 1.25 Correct answer.
  4. 5.00

Explanation

The degree of financial leverage is EBIT divided by EBIT minus interest. Here $500,000 ÷ ($500,000 − $100,000) = 1.25, meaning a 1% change in EBIT produces a 1.25% change in earnings per share.

Question 49Corporate Finance

A company has inventory conversion period of 60 days, a receivables collection period of 45 days, and a payables deferral period of 30 days. What is its cash conversion cycle?

  1. 75 days Correct answer.
  2. 45 days
  3. 135 days
  4. 105 days

Explanation

The cash conversion cycle equals inventory days plus receivables days minus payables days. Here 60 + 45 − 30 = 75 days, the length of time the firm must finance its operating assets.

Question 50Corporate Finance

A firm issues preferred stock with a $8 annual dividend per share. The stock sells for $100 per share and flotation costs are 4% of the issue price. What is the cost of the preferred stock?

  1. 12.50%
  2. 8.70%
  3. 8.00%
  4. 8.33% Correct answer.

Explanation

The cost of preferred stock is the annual dividend divided by the net proceeds per share. Net proceeds are $100 × (1 − 0.04) = $96, so the cost is $8 ÷ $96 = 8.33%.