A customer default would expose a company to a $2,000,000 loss before recovery. Management estimates a 3% probability of default and a 40% loss given default after collateral recovery. What is the position's probability-weighted expected loss?
A. $60,000
B. $800,000
C. $24,000
D. $1,940,000
Show answer and reasoning
Correct answer: C. $24,000
Expected loss equals exposure at default × probability of default × loss given default: $2,000,000 × 3% × 40% = $24,000.
- A: This multiplies exposure by default probability but assumes a 100% loss given default.
- B: This applies loss given default to the full exposure but ignores the 3% default probability.
- D: This subtracts expected default frequency from exposure and is not a probability-weighted loss.
Source: PRIMARY -- Supervisory Guidance on Model Risk Management, model outputs and uncertainty discussion (https://www.federalreserve.gov/boarddocs/srletters/2011/sr1107a1.pdf)
A controller discovers that the company breached a debt covenant before year-end. The CFO directs the controller to omit the breach from a report prepared for the audit committee and says disclosure can wait until refinancing is complete. What is the controller's most appropriate initial response under IMA's ethical framework?
A. Omit the breach because the CFO has exclusive authority over every communication sent to the audit committee, regardless of materiality
B. Send the incomplete report and the covenant details to external parties immediately, before using any internal discussion or governance channel
C. Explain the ethical concern to the CFO and follow the organization's established escalation policy if it is not resolved
D. Resign immediately, destroy all working notes, and make no documented attempt to use the organization's prescribed ethical-resolution process or governance escalation channels
Show answer and reasoning
Correct answer: C. Explain the ethical concern to the CFO and follow the organization's established escalation policy if it is not resolved
The controller should not knowingly participate in an incomplete or misleading communication. IMA's resolution guidance begins with established organizational policies and discussion with the immediate supervisor unless that person appears involved; unresolved matters are escalated to the next appropriate level.
- A: Reporting authority does not excuse a management accountant from integrity and credible communication duties.
- B: External disclosure may violate confidentiality and bypasses the prescribed internal resolution process.
- D: Disassociation may eventually be necessary, but immediate resignation skips documentation, policy review, and appropriate escalation.
Source: PRIMARY -- Resolving Ethical Issues; Integrity; Credibility (https://www.imanet.org/about-ima/ethics-center/statement-of-ethical-professional-practice)
An analyst is comparing two companies using return on average assets. One company reports net income of $480,000, beginning total assets of $5,700,000, and ending total assets of $6,300,000. Using net income divided by average total assets, what return on assets should the analyst report?
A. 8.0%
B. 7.6%
C. 8.4%
D. 16.0%
Show answer and reasoning
Correct answer: A. 8.0%
Average assets are ($5,700,000 + $6,300,000) ÷ 2 = $6,000,000. Return on assets is $480,000 ÷ $6,000,000 = 8.0%.
- B: This divides income by ending assets rather than the average asset base.
- C: This divides income by beginning assets rather than the average asset base.
- D: This incorrectly doubles the return after already averaging the asset balances.
Source: PRIMARY -- Appendix A, Return on Total Assets (https://openstax.org/books/principles-financial-accounting/pages/a-financial-statement-analysis)
A manufacturer averages 55 days of inventory, collects receivables in 32 days, and pays suppliers in 40 days. Assuming those measures are comparable, what is its cash conversion cycle?
A. 23 days
B. 87 days
C. 127 days
D. 47 days
Show answer and reasoning
Correct answer: D. 47 days
The cash conversion cycle is days inventory outstanding + days sales outstanding − days payables outstanding: 55 + 32 − 40 = 47 days.
- A: This subtracts receivable days from inventory days and omits supplier financing.
- B: This adds inventory and receivable days but fails to subtract payables days.
- C: This adds all three measures even though payables defer the cash outflow.
Source: PRIMARY -- Section 19.1, The Cash Cycle, equation 19.4 (https://openstax.org/books/principles-finance-2e/pages/19-1-what-is-working-capital)
Which action best demonstrates the IMA ethical standard of competence when a management accountant is assigned a valuation using an unfamiliar option-pricing model?
A. Use the unfamiliar model without review because merely accepting the assignment establishes sufficient technical competence for any resulting valuation
B. Replace the option-pricing model with a familiar discounted-cash-flow method even when that substitute does not represent the instrument's economic features
C. Delegate the entire valuation to another employee and disclaim all responsibility for reviewing the assumptions, method, result, or resulting communication
D. Obtain appropriate training or expert assistance, disclose relevant limitations, and perform the work under applicable technical standards
Show answer and reasoning
Correct answer: D. Obtain appropriate training or expert assistance, disclose relevant limitations, and perform the work under applicable technical standards
Competence requires maintaining appropriate expertise, performing duties under relevant laws and technical standards, and providing accurate, clear, concise, and timely decision-support information. Training or qualified assistance and transparent limitations address the knowledge gap.
- A: Assignment acceptance does not create the technical knowledge needed to perform the work competently.
- B: Familiarity does not justify a method that is inappropriate for the stated valuation objective.
- C: Using assistance does not eliminate the accountant's responsibility for competent and credible work.
Source: PRIMARY -- Principles and Standards — Competence (https://www.imanet.org/about-ima/ethics-center/statement-of-ethical-professional-practice)
