CMA Fundamentals, Vol. 1 Introduction to the CMA Fundamentals Book... 1 Introduction to Economics... 2 Economics Overview 3 Microeconomics... 4 Demand 4 Price Elasticity of Demand 10 Cross Elasticity of Demand (Substitute or Complementary Goods) 19 Income Elasticity of Demand (Normal or Inferior Goods) 19 Utility Theory: The Benefit Derived by the Consumer 21 The Indifference Curve: What the Consumer Wants to Buy 23 Budget Constraints: What the Consumer is Able to Buy 24 Supply 35 Elasticity of Supply 37 Individual Market Equilibrium... 39 Production Costs... 48 Classification of Costs 48 Explicit Costs versus Implicit Costs 49 Economic Profit versus Accounting Profit 50 Economic Rent 53 Short-Run Versus Long-Run Costs 54 Marginal Costs and Average Costs 55 Production Costs in the Long Run 58 Market Structures... 62 Perfect Competition 62 Pure Monopoly 70 Monopolistic Competition 76 Oligopoly 79 Summary of Types of Market Structures 83 Resource Planning... 86 Decision-making About Production 86 Marginal Resource Cost 90 Cost of Labor 91 Resource Demand 93 Optimal Combination of Resources 95 Governmental Regulation... 99 Antitrust Regulations 99 Industrial Regulation by Government of Natural Monopolies 106 2016 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited. i
CMA Fundamentals, Vol. 1 Macroeconomics... 111 Macroeconomics Overview 111 National Income Accounting... 112 Methods of Calculating the Value of U.S. Output 113 Aggregation of the National Economy... 123 Aggregate Demand 123 Aggregate Supply 126 Aggregate Demand Shocks and Aggregate Supply Shocks 129 Economic Growth... 133 Investment Expenditure in the Economy... 136 Business Cycles... 137 Stages of a Business Cycle 137 Economic Indicators 140 Money and the Economy... 144 The Money Supply 144 Demand for Money 145 Equilibrium Interest Rate 146 Banks and Deposit Creation 148 Government and the Economy: Monetary Policy... 151 Structure of the Federal Reserve 151 Functions of the Federal Reserve 152 Unemployment and the Economy... 160 Types of Unemployment 160 Costs of Unemployment 161 Full Employment and the Natural Rate of Unemployment 161 Inflation vs. Unemployment and the Phillips Curve 162 Government and the Economy: Fiscal Policy... 163 Demand-Side Fiscal Policy 163 Supply-Side Fiscal Policy 168 Government Funding 169 Classifications of Taxes 170 Inflation and the Economy... 175 Costs of Inflation 179 Redistribution Effects of Inflation 179 Measurements of Inflation 180 Real vs. Nominal Variables 181 Deflation and the Economy 182 Macroeconomic Theories... 183 Summary of Macroeconomic Theories 183 ii 2016 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited.
CMA Fundamentals, Vol. 1 Global Business... 188 International Trade... 188 Multinational Corporations (MNCs) 188 Trade Barriers 190 Economic Effects of Trade Barriers 192 Arguments to Support Protectionism 195 Measures to Avoid Trade Barriers 197 Government Support of Exports through the Export-Import Bank 197 Comparative Advantage... 199 Comparative Advantage Determination 200 Terms of Trade The Exchange Rate 203 Absolute Advantage versus Comparative Advantage 205 Advantages and Disadvantages of Free Trade 209 Foreign Currency Markets and Exchange Rates... 210 Direct Quotes versus Indirect Quotes 210 Foreign Exchange Markets and Their Operation 211 Foreign Exchange Transaction Risk 232 Use of Foreign Financing to Reduce Borrowing Costs 242 Foreign Direct Investment... 245 International Trade Agreements and Organizations... 250 General Agreement on Tariffs And Trade 250 World Trade Organization (WTO) 250 Regional Trade Agreements 252 International Economic Organizations... 254 Global Economic Summit: G20, or Group of Twenty 254 Basel Committee on Banking Supervision 254 World Economic Forum (WEF) 254 International Monetary Institutions... 255 International Monetary Fund 255 The World Bank 255 Cross-Border Movements of Capital... 256 International Accounts and Transactions... 258 Quantitative Methods... 266 Decision-Making and Quantitative Methods 266 Probability... 268 Two Requirements of Probability 268 Probabilities of Independent Events and Mutually Exclusive Events 268 Dependent Events and Conditional Probability 275 Three Methods of Assigning Probable Values 277 Discrete and Continuous Random Variables... 278 2016 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited. iii
CMA Fundamentals, Vol. 1 Discrete Random Variable Probability Distributions 278 Continuous Random Variable Probability Distributions 280 Risk, Uncertainty, and Expected Value... 281 Summary of Probability and Expected Value... 282 Answers to Questions... 283 iv 2016 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited.
CMA Fundamentals, Vol. 2 Introduction to the CMA Fundamentals Book... 1 Financial Accounting... 2 Conceptual Framework 2 The Objective of Financial Reporting 3 Elements of Financial Statements 3 Qualitative Characteristics of Useful Accounting Information 3 Recognition, Measurement, and Disclosure Concepts 5 The Financial Statements 10 The Balance Sheet (Statement of Financial Position) 10 The Income Statement 18 The Statement of Cash Flows (SCF) 24 Statement of Comprehensive Income 26 Statement of Changes in Stockholders Equity 28 Limitations of Financial Statements 29 U.S. Accounting Regulations and the FASB... 30 History of the Accounting Standard Setting Process 30 The IASB (International Accounting Standards Board)... 31 Cash and Cash Equivalents... 33 Cash 33 Cash Equivalents 36 Accounts Receivable... 37 Determining the Receivable Amount and Valuing the Receivable 37 Percentage of Sales Method 42 Percentage of Receivables Method 43 Discounts and Initial Recording of the Account Receivable 45 Trade Discounts 45 Cash Discounts (Sales Discounts) 46 Sales Returns 48 Immaterial Amount of Returns 48 Material Amount of Returns 49 Customer Deposits 49 Receivables as an Immediate Source of Cash 51 Factoring of Accounts Receivable 52 Assigning Accounts Receivable 56 Notes Receivable... 57 Valuation of Notes Receivable 58 Valuation of Short-Term Notes Receivable 58 Valuation of Long-Term Notes Receivable 58 Calculation of Interest Revenue 60 2017 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited. i
CMA Fundamentals, Vol. 2 Calculation of Interest Receivable 61 Amortization of the Premium or Discount 61 Calculating the Gain or Loss on Sale of an Asset Represented by a Note Receivable 63 The Fair Value Option 66 Impairment of Long-Term Notes Receivable 67 Discounting of Notes Receivable 67 Investments in Marketable Securities... 69 Overview of Accounting for Marketable Securities 69 The Fair Value Option 71 Key Issues in Accounting for Marketable Securities 71 Determining the Acquisition Cost 71 Amortizing the Premium or Discount on Debt Securities Held as Investments 71 Subsequent Changes in Market Value of Securities Accounted for at Fair Value 79 Realized Gain or Loss on Sale of Security 84 Transferring Securities between Categories 88 Marketable Securities Summary 89 Financial Instruments and Derivatives... 92 Inventory... 95 Classifications of Inventory 95 Valuing the Inventory When It Is Purchased 96 What Goods Are Included in Inventory 96 What Costs Are Included in Inventory 97 Determining Which Item Is Sold Cost Flow Assumptions 98 First in First Out (FIFO) 98 Last in First Out (LIFO) 99 Average Cost 101 Effect of the Different Methods 101 The Frequency of Determining Inventory Balances 102 Periodic System 102 Perpetual System 103 The Physical Inventory Count 108 Gross Profit Calculation 108 Errors in Inventory 110 Dollar-Value LIFO 112 The DVLIFO Calculations 113 Recognizing Permanent Declines through the Lower of Cost or Market (LCM) 120 LIFO and LCM 121 Estimating Inventory 123 Gross Profit Method 123 Retail Method 124 Other Inventory Items 138 Property, Plant and Equipment... 141 ii 2017 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited.
CMA Fundamentals, Vol. 2 Measurement at Acquisition 141 Internally Constructed Assets 142 Method of Payment at Acquisition 142 Capitalization of Interest on Internally-Constructed Assets 144 Depreciation 150 Calculation of Depreciation 151 Depreciation Methods 151 Depreciation in the Year of Acquisition and the Year of Disposal 155 Subsequent Expenditures 158 Acquisitions and Disposals by Exchange 159 Accounting for Exchanges of Fixed Assets that Have Commercial Substance 160 Accounting for Exchanges of Fixed Assets that Lack Commercial Substance 161 Cash Received in a Nonmonetary Exchange that Lacks Commercial Substance 163 Exchanges of Inventory 165 Summary Nonmonetary Exchanges of Assets 167 Impairment of Long-Lived Assets to be Held and Used 169 Disposals of Long-Lived Assets 172 Long-Lived Assets to be Disposed of by Sale 172 Involuntary Disposals 173 Disposal by Donation 174 Intangible and Other Assets... 175 Introduction to Intangible Assets 175 Measurement at Acquisition 176 Amortization and Non-Amortization of Various Kinds of Intangibles 176 Specific Intangible Assets and their Accounting Treatments 177 Impairment of Intangible Assets 179 Impairment of Limited-Life Intangible Assets 179 Impairment of Indefinite-Lived Intangible Assets Other Than Goodwill 180 Impairment of Goodwill 180 Presentation of Intangible Assets 182 Research and Development (R&D) 183 Ways in Which Research & Development Costs Are Incurred 183 Accounting Treatment of R&D Expenses 183 Prepaid Expenses 184 Computer Software 185 Current Liabilities... 187 Definitely Determinable Liabilities 187 Accounts Payable 187 Short-Term Interest-Bearing Notes Payable 187 Short-Term Zero-Interest-Bearing Notes 188 Current Maturities of Long-Term Debt 189 Dividends Payable 189 2017 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited. iii
CMA Fundamentals, Vol. 2 Unearned Revenue 189 Customer Advances and Deposits Received 189 Sales Taxes Payable 190 Income Taxes Payable 190 Employee-Related Liabilities 191 Estimated Liabilities 191 Compensated Absences 191 Contingencies and Contingent Liabilities 191 Warranties 193 Premiums and Coupons 195 Refinancing of Short-Term Obligations 197 Non-Current Liabilities... 198 Bonds 198 Introduction to Bonds 198 Accounting for Bonds 202 Leases 237 Companies that Offer Leasing 238 Advantages of Leasing 238 Accounting for Leases 239 Classification of Leases by the Lessee and the Lessor 240 Leasing Questions 242 Long-Term Notes Payable 243 Notes Issued at Face Value 243 Notes Not Issued at Face Value 244 Mortgage Notes Payable 246 Troubled Debt Restructurings 248 Pensions... 250 Types of Pension Plans 250 Defined Contribution Plans 250 Defined Benefit Plans 251 Accounting for Income Taxes... 253 Deferred Taxes 253 Presentation of Deferred Tax Assets and Liabilities on the Balance Sheet 262 Permanent Timing Differences 264 Treatment of Net Operating Losses 265 Intra-period Tax Allocation 267 Owners Equity... 268 Corporate Shareholders Equity 268 Common Stock 269 Issuing Common Stock 271 Dividends 272 Stock Dividends and Stock Splits 275 iv 2017 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited.
CMA Fundamentals, Vol. 2 Preferred Stock 277 Preferred Dividends 278 Share Issuance Costs 279 Retained Earnings 280 Appropriated Retained Earnings 280 Accumulated Other Comprehensive Income 281 Treasury Stock 283 Accounting for Treasury Stock 283 Recognition of Gain or Loss on Treasury Stock Transactions 284 The Cost Method 284 The Par Value Method 286 General Treasury Stock Summary 287 Treasury Stock Example 288 Retirement of Shares 290 Classification of Shares 293 Stock Rights 294 Stock Compensation... 296 Compensatory or Noncompensatory? 296 Liability or Equity? 296 Stock Option Plans 297 Restricted Stock 302 The Income Statement... 304 Income Statement Format 304 Classifications Within a Multi-Step Income Statement 305 Income from Continuing Operations 305 Gain/(Loss) from Discontinued Operations 308 Revenue Recognition... 314 When Revenue is Recognized 314 Revenue Recognized at the Completion of Production 314 Installment Method of Profit Recognition 315 Cost Recovery Method of Profit Recognition 319 Unearned Revenue 321 The Deposit Method 321 Revenue Recognition When the Right of Return Exists 321 Sales With Buyback Agreements 322 Channel Stuffing and Trade Loading 323 Goods in Transit 323 Consignment Sales 324 Accounting by the Consignor 325 Accounting by the Consignee 325 Royalties 325 Franchise Sales 326 2017 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited. v
CMA Fundamentals, Vol. 2 Long-Term Construction Contracts 328 Completed Contract Method 328 Percentage-of-Completion Method 329 Recognizing Losses on Long-Term Contracts 332 Closing Out a Completed Contract Under the Percentage-of-Completion Method 333 Milestone Method of Revenue Recognition 338 Summary of Coming Changes in Revenue Recognition Standards 339 Accounting Changes and Error Corrections... 340 Introduction to Accounting Changes and Error Corrections 340 Five Types of Accounting Changes and Corrections 340 Three Methods of Accounting for Changes or Corrections 341 A Change in Accounting Principle Retrospective Application 341 Required Disclosures When a Change in Accounting Principle is Made 343 A Change in Reporting Entity Retrospective Application 343 A Change in Accounting Estimate Prospective Adjustment 343 A Change in Accounting Estimate Effected by a Change in Accounting Principle 344 Correction of Errors Restatement 344 Presentation in the Financial Statements 345 Earnings Per Share... 347 Income Available to Common Stockholders (IAC) 347 Weighted Average Number of Common Shares Outstanding (WANCSO) 349 Basic Earnings Per Share 355 Diluted Earnings Per Share (DEPS) 358 EPS Disclosures 369 The Statement of Cash Flows... 370 Classification of Items within the Statement of Cash Flows 370 Overview of the Preparation of the Statement of Cash Flows 374 Format of the Statement of Cash Flows 377 Preparation of a Statement of Cash Flows Using the Direct Method 379 Preparation of a Statement of Cash Flows Using the Indirect Method 380 Cash Flow Questions 388 Foreign Currency Transactions... 390 Accounting for Foreign Currency Transactions 390 Hedging to Reduce Foreign Currency Risk 392 Table of Gains and Losses Calculations 395 Accounting for Foreign Operations... 397 Introduction to Accounting for Foreign Operations 397 Restatement of Non-U.S. GAAP Financial Statements into U.S. GAAP 397 Introduction to Conversion of Foreign Currency Financial Statements 397 Determining the Functional Currency of a Foreign Entity 399 Remeasurement To The Functional Currency 401 vi 2017 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited.
CMA Fundamentals, Vol. 2 Translation from the Functional Currency to the Reporting Currency 402 Specific Situations and Remeasurement and Translation 403 Which Method? 403 Summary 405 Accounting for Long-Term Investments... 407 Introduction 407 The Fair Value Method - Review 408 Acquisition of the Investment 408 Change in Fair Value of the Investment 408 Dividends Received 408 Income of the Investee Company 409 Intercompany Receivables and Payables 409 Disposal of the Investment 409 Impairment of a Fair Value Investment 409 The Cost Method 410 The Cost Method Compared and Contrasted With the Fair Value Method 410 Impairment of a Cost Method Investment 410 The Equity Method 411 When to Use the Equity Method 411 Acquisition of the Equity Method Investment 411 Post Acquisition Events 411 Other Considerations 413 Disposal of an Equity Investment 415 Changes in Level of Ownership or Degree of Influence 415 Changing from the Fair Value or Cost Method to the Equity Method 415 Changing from the Equity Method to the Fair Value or Cost Method 415 Summary 416 Business Combinations... 418 Accounting for a Business Combination 418 Determining the Purchase Price 418 Recording Assets and Liabilities 419 Goodwill 420 Bargain Purchase 420 Recording Equity 420 Consolidation of Financial Statements... 422 When to Present Consolidated Financial Statements 422 Consolidation Worksheet 424 Elimination of Intercompany Receivables and Payables 424 Elimination of the Effect of Intercompany Sales of Inventory 424 Elimination of the Effect of Intercompany Sales of Fixed Assets 425 Elimination of the Parent s Investment Account 425 Non-controlling Interests 425 2017 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited. vii
CMA Fundamentals, Vol. 2 Other Eliminations 425 Segment Reporting... 426 Reportable Segments 426 Disclosures for Reportable Segments 427 Accounting for Natural Resources... 429 Accounting Legislation in the United States... 433 The Securities Act of 1933 433 The Securities Exchange Act of 1934 434 Sarbanes-Oxley Act of 2002 434 Dodd-Frank Wall Street Reform and Consumer Protection Act 440 JOBS (Jumpstart Our Business Startups) Act 442 Audit Committee Requirements, Responsibilities and Authority... 443 Requirements for Audit Committee and Audit Committee members 443 Responsibilities of the Audit Committee: 444 Authority of the Audit Committee 446 The Annual Report... 447 The Financial Statements 448 The Notes to the Financial Statements 448 Auditor s Reports 449 The Report of Management 451 The Letter to Shareholders 451 The Management Discussion and Analysis 451 The Statement on Social Responsibility 451 The SEC and Its Reporting Requirements... 452 Registration (Filing) Requirements 453 Shelf Registration 455 Filing Procedures 455 Reporting Requirements 455 Annual Report to Shareholders (Form 10-K) 457 SEC Filings and the SEC s Integrated Disclosure System 457 The Basic Information Package (BIP) 458 Other Reporting Requirements 462 Proxy Solicitations 462 Shareholder Proposals 462 Appendix A Time Value of Money (Present/Future Value)... 463 Simple Interest 463 Compound Interest 464 Present Value 465 Present Value of $1 (A Single Sum) 465 Present Value of an Annuity (a Stream of Cash) 467 Present Value Questions 471 viii 2017 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited.
CMA Fundamentals, Vol. 2 Future Value 472 Future Value of $1 (a Single Sum) 472 Future Value of an Annuity (a Stream of Cash) 473 Future Value Questions 475 Present Value of $1 Table 477 Present Value of a $1 Annuity Table (Ordinary Annuity) 478 Future Value of $1 Table 479 Future Value of a $1 Annuity Table (Ordinary Annuity) 480 Answers to Questions... 481 2017 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited. ix
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