This study unit (“Multiple-Choice Questions”) and Study Unit 5 (“Essay Questions”) explain question formats that appear on the CMA exam. We also suggest time-budgeting and question-answering techniques for each.
You will probably recognize that your question-answering technique is a specific control system application. We cannot say that your question-answering technique control system is more important than your other control systems, which include understanding the exam, studying individual Gleim study units, and planning and practicing exam execution. You will, however, be confident about your performance on the CMA exam when you are poised to maximize your points on every question.
There are two parts to the CMA exam.
Financial Reporting, Planning, Performance, and Control
Financial Decision Making
Each part consists of 100 multiple-choice questions and two essay questions. The multiple-choice questions will be delivered in random order, meaning that the order of questions will not reflect the order in which the topics are presented in the CSOs. Four hours is allowed for the completion of an entire part (3 hours for the multiple-choice, 1 hour for the essays). If you complete your 100 multiple-choice questions by allocating 1.5 minutes per question, you will have 30 minutes to review. Use as much of this time to review as you need, and then move on to the essays. Your unused multiple-choice section time will be carried over to the essay section and added on to the hour time allocation.
Do not be surprised or flustered if you end up with time remaining on the clock when you have finished all 100 of your multiple-choice questions. If you have more than 30 minutes, do a thorough review of your marked questions, make sure you have answered all 100 questions, and move on to the essays knowing you have plenty of time.
If you finish with less than 30 minutes, do not panic. Remain calm and in control. Make sure you have answered all 100 questions (make educated guesses if you need to) and move on to the essays. One hour is certainly enough to answer both questions -- you’re doing fine! See the rest of this study unit and Study Unit 7, Subunit 9, for more information on time-budgeting and question-answering techniques for the multiple-choice section.
Conceptual vs. Calculation Questions
Some CMA exam questions will be calculations in contrast to conceptual questions. When you take the test, it may appear that more of the questions are calculation-type because they take longer and are more difficult.
See Study Unit 7, Subunit 6, for the calculators the ICMA has approved for use on the CMA exam.
Multiple-choice questions consist of a stem (the question) and four answer choices. One answer is correct, and three answer choices are incorrect. Another view is that there is one answer choice that is the best response to the question stem. Two CMA multiple-choice questions appear below.
1. Which one of the following best describes direct labor?
2. A firm has determined that it can minimize its weighted average cost of capital (WACC) by using a debt-equity ratio of 2/3. If the firm’s cost of debt is 9% before taxes, the cost of equity is estimated to be 12% before taxes, and the tax rate is 40%, what is the firm’s WACC?
Some multiple-choice questions contain words like except, not, unless, least, etc., as illustrated below.
Which of the following is not a method of financing international trade?
All of the following statements in regard to working capital are true except
These negative stems ask for the false answer choice, which is accompanied by three true answer choices. Expect a few multiple-choice questions with negative stems on the exam. Presumably, the ICMA will print these negative words in bold type, as illustrated above.
Other types of multiple-choice questions include
Occasionally, the ICMA converts two- and three-answer multiple-choice questions into four-answer multiple-choice questions. Mark each of the I, II, III, and IVs as true or false.
3. A large conglomerate with operating divisions in many industries uses risk-adjusted discount rates in evaluating capital investment decisions. Consider the following statements concerning the use of risk-adjusted discount rates.
Which of the above statements are correct?
Other multiple-choice questions have several variables (or answers) within each answer option and are presented in columns. Take note of the correct answer in each column.
4. The costing method that is properly classified for both external and internal reporting purposes is
Yet other questions require various graphical interpretation, as illustrated in question 5. below.
5. In referring to the graph of a firm’s cost of capital, if e is the optimal position, which one of the following statements best explains the saucer or U-shaped curve?
The answer explanations for the sample questions appear below.
According to candidate feedback, multiple-answer and column-type questions (see example questions 3. and 4.) are some of the most difficult to answer confidently. Gleim has produced a special Gleim Instruct supplemental video explaining how to best approach these multiple-choice questions. You can access this video from within your CMA Review course or at www.gleim.com/cmamcqhelp.
1. Answer (D) is correct.
REQUIRED: The best description of direct labor.
DISCUSSION: Direct labor is both a product cost and a prime cost. Product costs are incurred to produce units of output and are deferred to future periods to the extent that output is not sold. Prime costs are defined as direct materials and direct labor.
Answer (A) is incorrect. Direct labor is also a product cost. Answer (B) is incorrect. A period cost is expensed when incurred. Direct labor cost is inventoriable. Answer (C) is incorrect. Direct labor is also a prime cost.
2. Answer (C) is correct.
REQUIRED: The firm’s weighted-average cost of capital.
DISCUSSION: A firm’s weighted-average cost of capital (WACC) is derived by weighting the (after-tax) cost of each component of the financing structure by its proportion of the financing structure as a whole. The firm’s WACC can be calculated as follows:
Answer (A) is incorrect. Improperly subtracting the effect of taxes from the cost of equity results in 6.48%. Answer (B) is incorrect. Improperly subtracting the effect of taxes from equity, but not from debt, results in 7.92%. Answer (D) is incorrect. Improperly using the before-tax cost of debt results in 10.80%.
3. Answer (D) is correct.
REQUIRED: The true statement about use of risk-adjusted discount rates
DISCUSSION: Risk analysis attempts to measure the likelihood of the variability of future returns from the proposed investment. Risk can be incorporated into capital budgeting decisions in a number of ways, one of which is to use a hurdle rate higher than the firm’s cost of capital, that is, a risk-adjusted discount rate. This technique adjusts the interest rate used for discounting upward as an investment becomes riskier. The expected flow from the investment must be relatively larger, or the increased discount rate will generate a negative net present value, and the proposed acquisition will be rejected. Accordingly, the IRR (the rate at which the NPV is zero) for a rejected investment may exceed the cost of capital when the risk-adjusted rate is higher than the IRR. Conversely, the IRR for an accepted investment may be less than the cost of capital when the risk-adjusted rate is less than the IRR. In this case, the investment presumably has very little risk. Furthermore, risk-adjusted rates may also reflect the differing degrees of risk, not only among investments, but by the same investments undertaken by different organizational subunits.
Answer (A) is incorrect. Discount rates may vary with the project or with the subunit of the organization. Answer (B) is incorrect. The company may accept some projects with IRRs less than the cost of capital or reject some project with IRRs greater than the cost of capital. Answer (C) is incorrect. The company may accept some projects with IRRs less than the cost of capital or reject some project with IRRs greater than the cost of capital.
4. Answer (C) is correct.
REQUIRED: The costing method that is properly classified for both internal and external reporting purposes.
DISCUSSION: Activity-based costing, job-order costing, process costing, and standard costing can all be used for both internal and external purposes. Variable costing is not acceptable under GAAP for external reporting purposes.
Answer (A) is incorrect. ABC is appropriate for external as well as internal purposes. Answer (B) is incorrect. Job-order costing is acceptable for external reporting purposes. Answer (D) is incorrect. Process costing is acceptable for external reporting purposes.
5. Answer (D) is correct.
REQUIRED: The best explanation of the U-shaped curve in a cost-of-capital graph.
DISCUSSION: The U-shaped curve indicates that the cost of capital is quite high when the debt-to-equity ratio is quite low. As debt increases, the cost of capital declines as long as the cost of debt is less than that of equity. Eventually, the decline in the cost of capital levels off because the cost of debt ultimately rises as more debt is used. Additional increases in debt (relative to equity) will then increase the cost of capital. The implication is that some debt is present in the optimal capital structure because the cost of capital initially declines when debt is added. However, a point is reached (e) at which debt becomes excessive and the cost of capital begins to rise.
Answer (A) is incorrect. The composition of the capital structure affects the cost of capital since the components have different costs. Answer (B) is incorrect. The cost of debt does not remain constant as financial leverage increases. Eventually, that cost also increases. Answer (C) is incorrect. Increased leverage is initially favorable.
The following suggestions are to assist you in maximizing your score on each part of the CMA exam. Remember, knowing how to take the exam and how to answer individual questions is important while you study and review the subject matter tested.
The CMA exam sometimes includes questions that might seem confusing to you. Expect the unexpected and move forward. Educated guessing is a must. When you encounter such a question on the exam, do not let it affect your concentration or take up too much time. Use your best guess and move on. Gleim will continue to improve review material based on customer feedback and information releases from the test administrator.
If you don’t know the answer, make an educated guess. First, rule out answers that you feel are obviously incorrect. Second, speculate on the ICMA’s purpose and/or the rationale behind the question. Third, select the best answer or guess between equally appealing answers. Mark the question by clicking on the “Mark” button in case you have time to return to it for further analysis. However, unless you made an obvious mistake or computational error, try to avoid changing answers at the last minute. Your first guess is usually the most intuitive.
If you cannot make an educated guess, pick the most intuitive answer. Never leave a question unanswered.
NOTE: To perfect your educated guessing, take multiple-choice and true/false quizzes in the CMA Review Course BEFORE you study each study unit. See “How to Use the Gleim Review System” in Study Unit 6, Subunit 6.
Using the Gleim study system, you will complete a minimum of two 20-question Practice Exams for each study unit to help you answer multiple-choice questions in 1.5 minutes each. See Study Unit 7, Subunit 9, for more information on time budgeting. Practice makes perfect!
Live by and thrive on 20-question Practice Exams. We use 20-question Exams because they are of sufficient length to work you but are not too long. Based on decades of experience, we are very confident recommending and using 20-question Exams. You will have no trouble budgeting your time on the CMA exam after extensive practice with 20-question Exams.
Each Practice Exam should be completed in 30 minutes (plus 10 minutes for review) under exam conditions. Practice marking questions you wish to return to, but select the best answer for each question on your first pass.
It is imperative that you review each question you marked and/or answered incorrectly after you have completed each Exam. Analyze and understand why you answered each question incorrectly. This step is an essential learning activity because you learn more from each question of which you were unsure or answered incorrectly than from questions answered correctly. In other words, you learn from your mistakes, as we all do. It is important to learn and understand the subject matter tested and how to answer questions when you are unsure of the correct answer.
Learning from Your Mistakes
Learning from questions you answer incorrectly is very important. Each question you answer incorrectly is an opportunity to avoid missing actual test questions on your CMA exam. Thus, you should carefully study the answer explanations provided until you understand why the original answer you chose is wrong, as well as why the correct answer indicated is correct. This study technique is clearly the difference between passing and failing for many CMA candidates.
Also, you must determine why you answered questions incorrectly and learn how to avoid the same error in the future. Reasons for missing questions include
It is also important to verify that you answered correctly for the right reasons. Otherwise, if the material is tested on the CMA exam in a different manner, you may not answer it correctly.
The suite of online Gleim products emulates the Prometric testing procedures and environment, including computer screen layout, software operation, etc.