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Financial CMA Exam
Certified Management Accountant (Page 44 )

Updated On: 30-Jan-2026
Page 44 of 270
PDF with 1336 Questions
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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.



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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.



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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.



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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.



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The term that refers to costs incurred in the past that are not relevant to a future decision is

  1. Discretionary cost.
  2. Pull absorption cost.
  3. Under allocated indirect cost.
  4. Sunk cost.

Answer(s): D

Explanation:

A sunk cost cannot be avoided because it represents an expenditure that has already been made or an irrevocable decision to incur the cost.



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