FMAA Study Notes: General Accounting, Recording, Valuation, Budgeting, Cost Management, and Ethics (Section A–E)
Introduction to the FMAA Certification Exam
The FMAA Exam comprises five sections aligned with ICMA Learning Outcome Statements (LOS):
A. General Accounting and Financial Management (25%)
B. Financial Statement Preparation and Analysis (25%)
C. Planning and Budgeting (20%)
D. Cost Management and Performance Metrics (20%)
E. Professional Ethics (10%)
The exam format: 80 multiple-choice questions to be completed in 2 hours.
LOS are published by ICMA; candidates should download them from the IMA site for detailed scope.
Text is designed to prepare for the FMAA exam with a focus on core concepts in accounting, finance, budgeting, costing, and ethics.
Section A: General Accounting and Financial Management (25%)
Study Unit 1: A.1. Accounting Terminology and Definitions
The Role of Accounting in Business
Accounting is the process of recording, summarizing, analyzing, and reporting financial transactions.
Financial statements summarize a company’s operations, financial position, and cash flows over an accounting period.
Management accounting vs financial accounting: internal decision-making vs external reporting; GAAP/IFRS influence presentation and measurement.
Management Accounting vs Financial Accounting
Financial accounting uses GAAP to report historical performance to external stakeholders (owners, lenders, regulators).
Management accounting uses financial and non-financial data to support internal planning, budgeting, pricing, and decision making; less emphasis on GAAP/oversight.
Financial accounting provides the foundation for management accounting.
Types of Business Enterprises
Sole Proprietorship: unincorporated, single owner; taxed at personal level; simple to set up.
Corporation: legal entity with limited liability; can contract, own assets, borrow; shareholders’ liability limited to investment.
Private Company: privately held; shares not traded on public markets; fewer SEC requirements.
Public Company: shares traded on public exchanges; widely distributed ownership.
Partnership: two or more parties sharing profits/liabilities; can be equal or limited liability depending on structure; silent partners possible.
Joint Venture: strategic alliance between firms with shared returns and risks; may not be permanent; independent entities retain identity.
Nonprofit Organization: tax-exempt status in the US; donations may be tax-deductible; profits reinvested in mission; not for profit.
Accounting Principles
GAAP: generally accepted accounting principles; measurement and presentation standards (FASB in US).
IFRS: international standards set by IASB.
Conservatism: historically a bias toward recognizing potential losses sooner; not emphasized in GAAP but noted as relevant for revenue recognition; ICMA treats conservatism as noteworthy.
Consistency: use the same accounting methods over time; differences arise from actual transactions, not from changing policies.
Accounting Terminology
Business transaction: a monetary event affecting financial statements supported by source documents.
Source documents: evidence of events (invoices, receipts, time sheets, purchase orders, receiving reports).
Recordkeeping: recording events to create the accounting records.
Accounting period: defined time period for reporting (monthly, quarterly, yearly).
Closing entries: transfer of temporary account balances to Retained Earnings at period end.
GAAP: framework for financial reporting by standard-setters.
Balance sheet vs income statement differences; assets, liabilities, equity vs revenues/gains and expenses/losses.
Key definitions to memorize:
GAAP: accounting concepts and standards used for financial reporting.
Balance Sheet (Statement of Financial Position): assets, liabilities, and equity at a point in time.
Income Statement: revenues and gains minus expenses and losses over a period.
Cash flow vs net income: cash flows are actual cash receipts/payments; income statement is accrual-based.
Assets: present rights to future economic benefits.
Liabilities: present obligations to transfer assets or services.
Equity: net assets; residual interest after liabilities.
Revenues: inflows or enhancements from delivering goods/services.
Expenses: outflows or using up of assets to generate revenues.
Gains/Losses: non-operating increases/decreases in equity; not from core operations.
Notation and relationships
Balance Sheet = Assets = Liabilities + Equity (Assets on left, Liabilities + Equity on right).
Comprehensive income includes net income plus other comprehensive income (OCI) items not on the income statement.
Study Unit 2: A.2. Recording Business Transactions
Bookkeeping basics
Double-entry bookkeeping: every transaction affects at least two accounts; debits must equal credits.
The accounting equation must balance:
The difference between bookkeeping and accounting
Bookkeeping: recording transactions; initial steps of the accounting cycle.
Accounting: broader scope including system design, cost studies, tax work, auditing, etc.; still rooted in double-entry knowledge.
Recording changes in financial condition
Transactions may: increase one asset and decrease another; increase one liability and decrease another; decrease both assets and liabilities; increase asset and increase equity; etc., as long as the accounting equation balances.
Examples include asset-for-asset exchanges, new loans funding existing obligations, paying off debt, and equity financing via stock sales.
The Chart of Accounts
A list of all ledger accounts; accounts have numeric codes to classify and summarize data.
Typical structure: assets (begin with 1), liabilities (2), equity (3), revenues and gains, expenses and losses.
The general ledger consolidates all accounts and serves as the basis for financial statements.
The General Ledger and postings
General Ledger: collection of all ledger accounts.
When posting, each journal entry is linked to a page in the General Journal; ledger balances are updated; a general ledger report can be printed for analysis.
Debits and Credits
Debits increase asset accounts and decrease asset accounts on the liability/equity side; credits increase liability/equity and decrease asset; the inverse effects apply depending on account type.
Summary table (simplified):
Asset: Dr ↑, Cr ↓
Liability/Equity: Dr ↓, Cr ↑
The Accounting Cycle: Step 1–8
Step 1: Identify financial events and analyze effects.
Step 2: Journalize transactions (General Journal with date, accounts debited/credited, amounts, explanation).
Step 3: Post to Ledgers (General Ledger accounts).
Step 4: Prepare Unadjusted Trial Balance (UTB).
Step 5: Make Adjusting Entries (accruals, deferrals, depreciation, etc.).
Step 6: Prepare Adjusted Trial Balance.
Step 7: Prepare Financial Statements.
Step 8: Close temporary accounts to Retained Earnings; post-closing trial balance.
Journal entries and examples (key concepts)
A single debit entry and a corresponding credit entry balance in every transaction.
Compound journal entries involve multiple debits and/or credits in a single transaction.
Common example: paying cash to settle a loan reduces cash (Dr Cash) and reduces liability (Cr Loan Payable).
The General Journal format (highlights)
Date, Accounts Debited (A/C No), Debit, Credit, Explanation; if multiple debits, list all, then all credits; debits on the left, credits on the right.
Balance after each entry is tracked in the ledger.
Study Unit 3: A.2. Debits, Credits, and T-Accounts
Use of T-Accounts
T-Accounts illustrate debits on the left and credits on the right, to show how transactions affect accounts.
Debits increase asset accounts; credits decrease asset accounts.
Liabilities and Equity increase with credits and decrease with debits.
The normal balances concept: Asset = Debit balance; Liability/Equity = Credit balance (with exceptions for contra accounts).
Ledger accounts and postings
Ledger accounts track opening balances, debits, credits, and ending balances.
When posting from the General Journal to ledgers, include: the page reference to the journal, updated balances, and whether the balance is a Dr or Cr.
Normal balances and contra accounts
Normal balances: Asset (Dr), Liability (Cr), Equity (Cr), Revenue/Gains (Cr), Expenses/Losses (Dr).
Contra accounts reduce the value of a related account (e.g., Accumulated Depreciation contra-asset, Dividends contra-equity).
The eight-step accounting cycle details reiterated
Emphasize cross-checking via the trial balance to ensure debits = credits.
Study Unit 4: A.2. Example: Transactions for a New Business
Greenworks Distribution Company example (illustrative chart of accounts)
Chart of Accounts includes: Cash (11001), Inventory (14001), Land (17101), Buildings (17201), Furniture & Equipment (17301), Accounts Payable (21001), Common Stock (31001), APIC (31002), etc.; and later additions for Revenue, Cost of Goods Sold, etc.
Transactions described (highlights)
May 1: Issued 50,000 shares of $1 par value common stock at $10 per share for cash
Dr Cash 500,000; Cr Common Stock 50,000; Cr Additional Paid-in Capital 450,000.
May 2: Purchased land and a building for $300,000 in cash
Dr Land 100,000; Dr Buildings 200,000; Cr Cash 300,000.
May 15: Sold 25% of land (cost basis used); Cash received; Land reduced accordingly.
May 16: Purchased Furniture & Equipment on credit; Dr F&E 55,000; Cr Accounts Payable 55,000.
May 20: Purchased inventory on credit; Dr Inventory 50,000; Cr Accounts Payable 50,000.
May 25: Inventory returned for credit; Accounts Payable debited and Inventory credited.
Perpetual inventory system note
Inventory is increased on receipt of goods and decreased on sale; no separate periodic adjustment required.
Study Unit 5: A.2. The Unadjusted Trial Balance
Unadjusted Trial Balance (UTB)
A listing of all ledger accounts with debit and credit balances after postings, before adjusting entries.
The sum of debits should equal the sum of credits; used to verify that the ledger is in balance prior to adjustments.
Study Unit 6: A.2. Comprehensive Income
Comprehensive income concept
Defined by FASB as the change in equity (net assets) during a period from non-owner sources.
Includes all revenues, expenses, gains, and losses plus Other Comprehensive Income (OCI) items recorded directly in equity via Accumulated Other Comprehensive Income (AOCI).
Net income = revenues + gains − expenses − losses; transferred to Retained Earnings at year-end.
OCI items bypass the income statement and are recorded in AOCI.
Composition and reporting
The statement of comprehensive income includes the income statement plus OCI items; the net of OCI items adjusts the balance of AOCI.
The relationship between net income and equity: net income increases equity (via Retained Earnings); net loss decreases equity.
Study Unit 7: A.2. Subsidiary Ledger Accounts
Ledger overview and the need for sub-ledgers
Some ledgers (e.g., Accounts Payable) are too detailed if they include all supplier transactions; thus, subsidiary ledgers store individual supplier accounts (sub-ledgers) and a single control (general) account summarizes totals.
Accounts Payable control account equals the sum of the balances in all supplier sub-ledger accounts.
Reconciliation and postings
Regular reconciliations between control accounts and their sub-ledgers are essential to catch discrepancies.
In automated systems, sub-ledgers and control accounts update together; in manual systems, reconciliations are manual.
Examples of common subsidiary ledgers
Accounts Receivable sub-ledger per customer; Inventory sub-ledger per item; Accumulated Depreciation sub-ledgers for asset pools.
Study Unit 8: A.2. Example: Revenue and Expense Transactions
Revenue and expense recognition exemplified via Greenworks transactions
May 31 Payroll: Salaries & Wages Expense debited; Cash credited (short example).
June 2–June 30: Sales on account; cost of goods sold recognized; inventory adjustments; shipping-out expenses; utilities; etc.
Sales Revenue and Accounts Receivable increased; Cost of Goods Sold debited; Inventory credited; to reflect movement from inventory to expense.
Shipping-out expense, utilities expense, advertising expenses, and other operating costs are recorded against cash or payables as applicable.
Journal entries summary format (example pattern)
Debit: Accounts Receivable (or Cash) for revenue; Credit: Sales Revenue (or Revenue) to recognize revenue.
Debit: Cost of Goods Sold; Credit: Inventory to reflect cost of goods sold.
Debit: Shipping-out Expense; Credit: Cash.
Interplay with sub-ledgers and control accounts
Individual customer sub-ledger entries update AR; control AR updates accordingly; similarly for supplier payables and inventory.
Study Unit 9: A.2. Other Transactions with Example
Investing transactions
Example: Invest $100,000 in a Money Market Deposit Account (MMDA); classify as Cash Equivalents; Debit Cash Equivalents, Credit Cash.
Financing transactions
Example: Acquire equipment with a down payment and a term loan; record asset increase, cash decrease, and long-term debt increase.
Payments in advance and deferred revenues
Prepaid insurance, insurance expense recognition over time; deferred revenues reflect obligations to provide goods/services later.
Dividends
Dividends declared reduce equity; timing of cash dividend impacts liability (Dividends Payable) and cash.
Inventory and related cross-entries
Inventory purchases with payables; inventory returns; shipping-in and inventory adjustments; the effect on cash and accounts payable.
Study Unit 10–11: A.2. Adjusting Entries; Example Adjusting Entries
Purpose of adjusting entries
To align revenues and expenses to the proper accounting period (revenue recognition and matching principle);
To reflect asset valuations (depreciation, amortization, inventory obsolescence) and to recognize accrued expenses and deferrals.
Depreciation (example)
Total depreciation = sum of depreciation on building, furniture, warehouse equipment, etc.; journal: Debit Depreciation Expense; Credit Accumulated Depreciation (buildings, furniture & equipment).
Inventory adjustment
Physical inventory vs book balance: adjust Inventory to reflect physical count; debit Cost of Goods Sold; credit Inventory for the difference.
Prepaid expense adjustment
Recognize one period’s expense and reduce the prepaid asset accordingly (e.g., insurance expense for a month).
Utilities accrual and income tax accrual
Accrue utilities expense for the period; accrue income taxes payable for the period; adjust with journal entries.
End-of-period adjustments and the adjusted trial balance
After posting all adjusting entries, prepare the Adjusted Trial Balance; highlight new/adjusted accounts in bold in the TB.
Study Unit 12: A.2. Performing the Year-End Close With Example
Year-end close concept
Close income statement accounts (revenues, gains, expenses, losses) to Income Summary; then close Income Summary to Retained Earnings.
If there is a Dividends account, close it to Retained Earnings as a separate step.
Income Summary is a temporary holding account used in manual systems; not required in automated systems.
Net income reconciliation
Closing entries ensure the Income Summary balance equals net income and then transfer to Retained Earnings.
Post-closing trial balance
After closing, temporary accounts have zero balances; permanent accounts carry forward.
Section B: Asset and Liability Valuation (25%)
Asset and Liability Valuation (B.1)
Accounts Receivable valuation
Short-term receivables are valued at net realizable value (NRV): NRV = expected cash receipts from customers minus expected returns and allowances and credit losses.
Allowance for credit losses (ACG) is a valuation allowance (contra-asset) with a credit balance; net realizable receivable = gross AR − Allowance.
End-of-period recognition: record credit loss expense to adjust allowance to the present estimate (Dr Credit Loss Expense, Cr Allowance for Credit Losses).
Inventory valuation and cost flow assumptions
Items in inventory are valued at cost, including landed costs (purchase price + shipping/landing costs + taxes, etc.).
In-transit goods rules: determine ownership under shipping terms (FOB Shipping Point vs FOB Destination) for ending inventory.
Cost flow assumptions (FIFO, LIFO, Average Cost, Specific Identification) determine which units are deemed sold and which remain in ending inventory. IFRS disallows LIFO; GAAP permits FIFO, LIFO, and Average Cost (with caveats).
FIFO: ending inventory composed of most recently purchased items; COGS from oldest costs; rising prices → higher ending inventory, lower COGS.
LIFO: ending inventory composed of oldest items; COGS from newest costs; rising prices → lower ending inventory, higher COGS.
Other methods: Average Cost (weighted average) and Specific Identification (for unique items).
Property, Plant and Equipment (PP&E)
Initial recognition at historical cost (cost + directly attributable costs to prepare asset for use).
Depreciation allocated to expense over asset’s useful life; accumulated depreciation is a contra-asset account reducing asset book value.
Depreciation methods: Straight-Line (SL), Double Declining Balance (DDB), Sum-of-the-Years’-Digits (SYD).
Land is not depreciated. Improvements to assets may be capitalized.
Intangible assets
Initial recognition at cost; finite-life assets are amortized; indefinite-life assets are tested for impairment.
Internally generated intangibles are generally not capitalized (e.g., internal goodwill for a brand).
Liabilities valuation
Liabilities are present obligations; measurement is typically at the amount required to settle, often discounted present value for long-term items.
Section B.1 Presents Core Formulas (examples)
NRV for AR: NRV = Net realizable value
Inventory cost flow: Ending Inventory + COGS = Cost of Goods Available for Sale
COGS calculation under common methods (FIFO/LIFO/Average)
Depreciation: depreciation expense depends on the chosen method, life, and salvage value (if any).
Impairment: test for impairment when asset’s carrying amount exceeds recoverable amount.
Section B.2–B.3 (Revenue Recognition, Equity, and Ratio Analysis)
Revenue recognition (ASC 606-10-05-3): Identify the contract, separate performance obligations, determine price, allocate price, and recognize revenue when performance obligations are satisfied.
Equity transactions: common stock, APIC, dividends, treasury stock, and stock dividends (par/nonpar value structures); rules for recording and disclosures.
Financial statement analysis basics: vertical/common-size statements; horizontal/trend analysis; ratio analysis (liquidity, leverage, activity, profitability).
Section C: Planning and Budgeting (Section C covers 20%)
Budgeting concepts and the relationship between planning, budgeting, and performance evaluation.
Master Budget: comprises Operating Budget (sales, production, materials, labor, overhead, nonmanufacturing budgets) and Financial Budget (capital expenditures, cash budget, budgeted balance sheet, budgeted cash flows).
Static vs Flexible budgets; Rolling (continuous) budgets; Project budgeting; Zero-based budgeting.
Budgeting process participants: participative, authoritative, and consultative approaches; importance of top management support and cross-functional collaboration.
Budgeting performance measures: variance reporting, performance metrics; the need to avoid budgetary slack and to balance controllable vs non-controllable costs.
Key budgeting calculations include: unit sales, production requirements, direct materials usage and purchases, direct labor usage, manufacturing overhead allocation, ending inventories, cost of goods manufactured, cost of goods sold, and the impact on cash flows.
Section D: Cost Management and Performance Metrics (20%)
Cost measurement concepts
Based on level of activity: fixed, variable, mixed; behavior in total vs per unit; relevant range concept.
Fixed costs: remain constant within the relevant range; per-unit fixed cost changes with activity; examples include factory rent, depreciation on production equipment, plant management salaries.
Variable costs: vary with activity level in total; per-unit cost remains constant; examples include direct materials, direct labor, some overhead.
Mixed costs: contain both fixed and variable components (e.g., utilities with fixed base plus usage-based charges).
Manufacturing overhead allocation methods
Traditional (plant-wide) overhead allocation: allocate total overhead to products using a single cost driver (e.g., direct labor hours, machine hours).
Departmental overhead allocation: multiple cost pools and cost drivers; more accurate but costlier.
Activity-Based Costing (ABC): uses multiple cost pools and drivers to trace overhead more precisely to products/services; often used for internal decision-making (and adapted for GAAP reporting).
Cost and variance measures
Variance analysis: comparing actual costs to standard costs; management by exception focuses on material variances.
Flexible budget variance vs Sales volume variance:
Flexible budget variance = Actual results − Flexible budget amounts (adjusted for actual activity).
Sales volume variance = Flexible budget − Static (master) budget.
Standards vs actual costing
Standard costing: uses standard costs to value inventory and compute variances; often paired with a flexible budget.
Normal costing: actual direct costs with a predetermined overhead rate; overhead applied on actual base usage.
Actual costing: uses actual costs for everything; less common for external reporting.
CVP (Cost-Volume-Profit) analysis (breakeven and margins)
Break-even:
Unit Contribution Margin:
CVP assumptions: costs either fixed or variable; linear relationships; constant selling price within the relevant range; fixed costs within the relevant range; constant sales mix if multiple products.
ROI vs Residual Income (RI)
ROI:
RI:
Use cases: ROI for investment centers; RI to address ROI limitations and consider hurdle rates.
Performance measurement for segments
Customer profitability analysis: cost-to-serve customers; pricing and service decisions based on profitability.
Product profitability analysis: identify profitable vs unprofitable products; may require refined cost allocations.
The role of ethics in cost management and decision-making
Ethical considerations in cost reporting, pricing, and performance evaluation; alignment with IMA Code of Ethics.
Section E: Professional Ethics (10%)
IMA Code of Ethics (IMA Statement of Ethical Professional Practice)
Principles: Honesty, Fairness, Objectivity, Responsibility.
Standards: Competence, Confidentiality, Integrity, Credibility.
The standards require ongoing competence, following laws and standards, providing accurate information, and maintaining credibility.
Resolving ethical issues
Follow organizational policies, use anonymous helplines if available, consult counsel, or consider dissociation if unresolved.
Conflicts of Interest and Disclosure
Recognize conflicts of interest and recuse oneself when necessary; disclose potential conflicts and avoid compromising situations.
Confidentiality and integrity
Keep information confidential unless disclosure is authorized or legally required; ensure integrity and avoid misrepresentation.
Fraud prevention and ethical due diligence
Fraud triangle: Pressure, Opportunity, Rationalization. Management should reduce at least one leg of the triangle (e.g., strong governance, audits, whistleblower protections).
Ethical due diligence: assess ethics of counterparties in transactions (M&A, outsourcing, suppliers).
Fiduciary responsibility
Fiduciaries (e.g., accountants, auditors) owe duties to principals and the public; maintain trust and disclose material facts.
Key Formulas and Equations (LaTeX)
Accounting Equation:
Normal account balances:
Asset: Debit balance
Liability: Credit balance
Equity: Credit balance
Revenue/Gains: Credit balance
Expense/Losses: Debit balance
Debits and Credits effects (summary):
Asset: Dr ↑, Cr ↓
Liability/Equity: Dr ↓, Cr ↑
Comprehensive income components
Net income increases equity via Retained Earnings.
Other Comprehensive Income (OCI) items go to Accumulated Other Comprehensive Income (AOCI).
T-Account concepts
Debits left, Credits right; totals must balance per transaction; postings update balances.
Unadjusted and Adjusted Trial Balances
Unadjusted TB transfers balances from ledgers before adjustments; Adjusted TB after posting adjusting entries.
Inventory valuation methods (concepts only)
FIFO: Ending inventory uses most recent costs; COGS uses oldest costs.
LIFO: Ending inventory uses oldest costs; COGS uses newest costs.
Average cost: Weighted average cost per unit.
Depreciation (examples of methods)
Straight-Line:
Double Declining Balance:
Sum-of-the-Years' Digits (SYD): fraction based on remaining life; denominator = where n = useful life in years.
Break-even and CVP
Break-even (units): where CM = Selling price per unit − Variable cost per unit.
ROI and RI
ROI:
RI:
Connections and Real-World Relevance
The material connects core accounting concepts (transaction recording, trial balances, and closing) to real-world financial statements (balance sheet, income statement, and cash flows).
It links costing methods (standard, normal, actual) and overhead allocation to product costing decisions, pricing, and profitability analysis.
It integrates budgeting as a planning and control tool, highlighting the importance of variance analysis (master vs flexible budgets) and rolling budgets for dynamic environments.
It emphasizes ethics as foundational to professional practice (IMA Code) and highlights the consequences of fraud and conflicts of interest.
Quick Reference (study-ready bullets)
The eight-step accounting cycle recap: Identify events → Journalize → Post to ledgers → UTB → Adjusting entries → Adjusted TB → Financial statements → Close & post-closing TB.
Inventory valuation basics: landed costs; FIFO vs LIFO vs Average; in-transit rules; ending inventory vs COGS impact under each method.
PP&E: initial recognition at cost; depreciation; accumulated depreciation; land not depreciable.
OCI and comprehensive income: separate reporting; AOCI under equity; not all items flow to net income.
Budgeting: master budget comprises operating and financial budgets; static vs flexible vs rolling; participative budgeting benefits.
Cost management: fixed vs variable vs mixed costs; overhead allocation methods; ABC advantages and limits.
CVP and decision making: breakeven analysis; contribution margin; marginal analysis; relevant costs and sunk costs.
Ethics and governance: conflicts of interest, confidentiality, integrity, and credibility; risk management and whistleblowing mechanisms.
Note: The above notes synthesize the material from the transcript into