Financial Certified Management Accountant CMA Dumps in PDF

Free Financial CMA Real Questions (page: 43)


Details: Risk Analysis and Real Options 20

Which one of the following statements concerning cash flow determination for capital budgeting purposes is not correct?

  1. Tax depreciation must be considered because it affects cash payments for taxes.
  2. Book depreciation is relevant because it affects net income.
  3. Sunk costs are not incremental flows and should not be included.
  4. Networking capital changes should be included in cash flow forecasts.

Answer(s): B

Explanation:

Tax depreciation is relevant to cash flow analysis because it affects the amount of income taxes that must be paid. However, book depreciation is not relevant because it does not affect the amount of cash generated by an investment.




Details: Risk Analysis and Real Options 20

A depreciation tax shield is

  1. An after-tax cash outflow.
  2. A reduction in income taxes.
  3. The cash provided by recording depreciation.
  4. The expense caused by depreciation.

Answer(s): B

Explanation:

A tax shield is something that will protect income against taxation. Thus, a depreciation tax shield is a reduction in income taxes due to a company's being allowed to deduct depreciation against otherwise taxable income.




Details: Risk Analysis and Real Options 20

What is a challenge that the long-term aspect of capital budgeting presents to the management accountant?

  1. Activity can be tracked for a single accounting period.
  2. Capital projects affect multiple accounting periods.
  3. The flexibility of the capital budgeting decision.
  4. Freedom of the organization's financial planning.

Answer(s): B

Explanation:

Capital budgeting is the process of planning and controlling investments for long-term 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 decisions tend to be relatively inflexible.




Details: Risk Analysis and Real Options 20

Which of the following is not a category of relevant cash flows?

  1. Annual net cash flows.
  2. Project termination cash flows.
  3. Incremental cash flows.
  4. Net initial investment.

Answer(s): C

Explanation:

Relevant cash flows are a much more reliable guide when judging capital projects, since only they provide a true measure of a project's potential to affect shareholder value. The relevant cash flows can be divided into three categories: (1) net initial investment, (2) annual net cash flows, and (3) project termination cash flows. An incremental cash flow is the difference in cash received or disbursed resulting from selecting one option instead of another. It is not a category of relevant cash flows.




Details: Risk Analysis and Real Options 20

The capital budgeting process contains several stages. At which stage are financial and non-financial factors addressed?

  1. Identification and definition.
  2. Selection.
  3. Search.
  4. Information-acquisition.

Answer(s): D

Explanation:

During the information-acquisition stage of the capital budgeting process, quantitative financial factors are given the most scrutiny. These include initial investment and periodic cash inflow. Nonfinancial measures, both quantitative and qualitative, are also identified and addressed. Examples include the need for additional training on new equipment and uncertainty about technological developments and competitors' actions.



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