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CMA Part 1

CMA Part 1: Financial Reporting, Planning,

Performance and Control
CMA Part 1
CMA Part 1 : Syllabus CMA Part 1
•Part One: Financial Reporting, Planning,
Performance, and Control
•15% External Financial Reporting Decisions
•30% Planning, Budgeting, and Forecasting
•20% Performance Management
•20% Cost Management
•15% Internal Controls

4 Hours Exam -- 100 Mcqs 3 Hours

2 Essays 1 Hour
S U 1

CMA Part 1
External Financial Reporting
CMA Part 1
Financial Statements
 Financial Statement

A financial statement (or financial report) is a formal record of the

financial activities and position of a business, person, or other entity.

 User:

The person receiving these reports is termed the user of the financial
CMA Part 1
Users of Financial Statements

 Management  Tax Authorities

 Shareholders  Portfolio managers

 Employees  Stock exchanges

 Banks

 Suppliers

 Customers
CMA Part 1
Users of Financial Statements -Internal

 Management: for analyzing the  Owners: for analyzing the viability and
organization's performance and profitability of their investment and
position and taking appropriate determining any future course of
measures to improve the company action.
 Accounting information is presented to
 Employees: for assessing company's internal users usually in the form of
profitability and its consequence on management accounts, budgets,
their future remuneration and job forecasts and financial statements.
CMA Part 1
Users of Financial Statements-External
 Creditors: for determining the credit commit any financial resources to the
worthiness of the organization. Terms of company.
credit are set by creditors according to the
assessment of their customers' financial  Customers: for assessing the financial
health. Creditors include suppliers as well as position of its suppliers which is necessary
lenders of finance such as banks. for them to maintain a stable source of
supply in the long term.
 Tax Authourities: for determining the
credibility of the tax returns filed on behalf  Regulatory Authorities: for ensuring that the
of the company. company's disclosure of accounting
information is in accordance with the rules
 Investors: for analyzing the feasibility of and regulations set in order to protect the
investing in the company. Investors want to interests of the stakeholders who rely on
make sure they can earn a reasonable such information in forming their decisions.
return on their investment before they
CMA Part 1
Types of Business
CMA Part 1
Financial Statements

A set of financial statement consist of four related accounting reports that

summarize in a few pages the financial recourse, obligations, profitability
and cash transactions of a business

 Income Statement (Profit and Loss a/c)

 Retained Earning Statement (Statement showing changes in equity )

 Statement of Financial Position(Balance sheet)

 Statement of Cash Flows

 Notes to the Financial Statements

CMA Part 1
Income Statement

 Income Statement shows the performance of the company for

the particular period

 it is prepared using temporary accounts(nominal accounts)

 Methods:
 Single step
 Multi step
CMA Part 1
Income Statements – Single Step

 Format:
Revenues xxxx

Less: Total Expenses xxxx

Profit/Loss xxxx

• No gross profit is shown

• Not allowed for external reporting
CMA Part 1
Income Statement-Multi Step
Income Statement
For the period ended 31st December….
(US$ ‘000)
Sales xxxx
Less: COGS (XX)
Gross profit xxxx
Less: Operating Expenses:
Admin xxx
Selling And Dist xxx (xxx)
Operating Profit(EBIT) xxxx
Less: Interest (xxx)
Profit before tax(EBT) xxxx
Tax (xxx)
Net Income xxxx
CMA Part 1
Net Sales

 Revenue from the sale of principal goods or services sold to


 Shown net of
 Discounts
 Returns
 Allowances
Cost of Goods Sold
 The cost of goods that were sold to produce revenue
Retailer Manufacturer
Beginning Inventory Beginning Inventory
+ Purchases + Cost of Goods
– Ending Inventory
– Ending Inventory
= Cost of Goods Sold
= Cost of Goods Sold
Operating Expenses
 Selling expenses
 Result from the company’s effort to create sales
 Examples
 Advertising
 Sales commissions
 Sales supplies used

 Administrative expenses
 Relate to the general administration of the company’s
 Examples
 Salaries
 Insurance
 Bad debt expense
Other Income or Expense
 Secondary activities not directly related to operations
 Dividend income
 Interest income
 Gains (losses) from sale of assets
 Interest expense
Special Income Statement Items

 Unusual or Infrequent Items Disclosed Separately

 If material, disclosed separately, before income taxes
 Relate to operations
Special Income Statement Items
 Discontinued Operations
 Reported net of income tax
 Analysis issues:
 Inadequate disclosure of associated assets
 Lack of historical profit and loss information on the
discontinued operations
Special Income Statement Items (cont’d)
 Extraordinary Items
 Unusual and infrequent
 Reported net of income tax
 Analysis issues:
 Exclude from primary analysis
 Include for supplementary analysis
Comprehensive Income
Net income
+ The period’s change in accumulated other comprehensive income
= Comprehensive income

• Foreign currency translation adjustments

• Unrealized holding gains and losses on available-for-sale marketable securities
• Changes to owners' equity resulting from additional minimum pension liability
• Unrealized gains and losses from derivative instruments
Comprehensive Income –
Separate Statement

XYZ Corporation
Statement of Comprehensive Income
For the Year Ended December 31, 20XX

Net income $ 34,000

Other comprehensive income
Available-for-sale security adjustment, net of tax 5,500
Minimum pension liability adjustment, net of tax 3,500
Foreign currency transaction adjustment, net of tax (5,000)
Total other comprehensive income 4,000
Comprehensive income $ 38,000
Comprehensive Income –
Combined with Income Statement
XYZ Corporation
Statement of Income and Comprehensive Income
For the Year Ended December 31, 20XX

Sales $ 230,000
Cost of goods sold 140,000
Gross profit 370,000
Operating expenses 40,000
Operating income 330,000
Other income 4,000
Income before income taxes 326,000
Income taxes 20,000
Net income 306,000
Other comprehensive income
Available-for-sale security adjustment, net of tax 5,500
Minimum pension liability adjustment, net of tax 3,500
Foreign currency transaction adjustment, net of tax (5,000)
Other comprehensive income 4,000
Comprehensive income $ 310,000

Earnings per share (for net income only) $ 2.80

CMA Part 1
Limitations of Income Statement
 The accounting process is based on various assumptions and estimates. Therefore, the net
income (or loss) measured by preparing an income statement is not absolutely accurate. An
example of estimates used in the accounting process is the depreciation which is computed on
the basis of estimated useful life of assets such as building, plants and equipment etc.

 The use of judgments and estimates in the accounting process enables management to use such
figures that would generate desired net income or net loss figure for the period.

 A manipulation in net income is possible by using a particular inventory valuation method such
as FIFO method, LIFO method and average costing method. The company may use such method
that generates the desired result.

 While preparing income statement we take into account only those activities whose value can
be objectively measured.
 For example, a sound customers relation policy can develop a good customer base that can certainly
be beneficial for a profitable business operation but its value cannot be objectively measured unless
evidenced by an actual business transaction.
CMA Part 1
CMA Part 1
Cost of Goods Sold
 Cost of goods sold (COGS) are the direct costs
attributable to the production of the goods sold by a

 This amount includes the cost of the materials used in

creating the good along with the direct labor costs used
to produce the good.
CMA Part 1
Statement of Owner’s Equity

 It’s explains certain change in the amount of the owner’s equity in the
business. In business which is organized as corporation the statement of
owner’s equity is replaced by the statement of retained earnings.
CMA Part 1
Statement of Owner’s Equity
CMA Part 1
Earnings Per Share - EPS

 The portion of a company's profit allocated to each

outstanding share of common stock.

 Earnings per share serves as an indicator of a company's


 EPS Calculated as:

CMA Part 1
Stocks (Share Capital)
 Share capital refers to the funds that a company raises in exchange for issuing an
ownership interest in the company in the form of shares. There are two general
types of share capital, which are common stock and preferred stock. The
characteristics of common stock are defined by the state within which a
company incorporates.


Preferred Common
CMA Part 1
Common Stock & Preferred Stock
 “Common stock possesses the traditional right of ownership
voting right, participation in dividends, and a residual claim
to assets in the event of liquidation.”

 “Preferred stock generally has a dividend that must be paid

out before dividends to common stockholders and the
shares usually do not have voting rights is called preferred
CMA Part 1
CMA Part 1

Common Preferred
Voting Rights Yes No
Obligation to pay No Yes

Accumulation of No Yes

Priority over No Yes

CMA Part 1
CMA Part 1
CMA Part 1
Statement of Financial Position (Balance sheet)
 A balance sheet shows the financial position of the company at a specific date
by indicating the resource that it owns, the debt that it owes and the amount of
the owner’s equity or investment in the business.

 Balance sheet consists of permanent accounts (i.e personal & real)

 B/S shows us "what we own" and "what we owe"

 What we Own:
 Assets ==> Resources (Current and Fixed assets)

 What we Owe:
 Liabilities ===> Obligations (CL, Long term Liabilities and Equity)
Statement of Financial Position
CMA Part 1
(Balance sheet)
 Balance sheets is used to know liquidity, net worth and in the
calculation of return on investment

 Balance sheet equations

A = L + E
( External) (Internal)
from owner's perspective:
E = A - L
Statement of Financial Position CMA Part 1
(Balance sheet)




Statement of Financial Position CMA Part 1
(Balance sheet)
&Equity Side


Long Term


Super 6
CMA Part 1
Equity - Super 6

 Preference Share Capital xxx

 Paid in Excess par – Pref. xxx

 Common Share Capital xxx

 Paid in Excess of par – Common xxx

 Retained Earnings xxx

 Treasury Stock (xx)

Equity xxxx
CMA Part 1
CMA Part 1
Limitations of the Balance Sheet
 Asset, Liability and Entity values are at a particular point in time only (these
values will change over time)

 The entity’s value is not really reflected in balance sheet due to

 Items that generate future benefits or involve future sacrifices not satisfying
definition/recognition criteria
 The historical nature (or combinations of cost and fair values) of the Balance Sheet

 Preparing a Balance Sheet involves:

 management choices
 judgements and estimations
CMA Part 1

Thank You…